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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C.
20549

FORM 20-F /A
  (Amendment No. 1)

[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934

OR

[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 31, 2011

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

OR

[ ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-18701

POLYMET MINING
CORP.(Formerly Fleck Resources Ltd.)(Exact name of
Registrant as specified in its charter)

British Columbia, Canada(Jurisdiction of
incorporation or organization)

Suite 390  3600 Lysander Lane, Richmond, British Columbia
V7B 1C3(Address of principal executive offices)

Douglas Newbyc/o PolyMet Mining Inc.PO Box 475 
  6500 County Road 666 
  Hoyt Lakes, Minnesota 55750 
  Tel: 212-867-1834
  Fax: 646-365-3230 
  E-mail: dnewby@polymetmining.com(Name, telephone, e-mail and/or facsimile number and address of Company
  contact person)

Securities registered or to be registered pursuant to Section
12(b) of the Act:

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Common Shares, without par value(Title of Class)

Name of each exchange on which registered

NYSE Amex Toronto Stock Exchange

Securities registered or to be registered pursuant to Section
12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the
issuer's classes of capital or common stock as of the close of the period
covered by the annual report. 154,825,191

Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.[ ]Yes[ x ]No

If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports pursuant to Section
13 of 15(d) of the Securities Exchange Act of 1934.[ ]Yes[ x ]No

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days. [ x ]Yes[ ]No

Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Date File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes[ ] No[ ]

Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of accelerated filer and large accelerated filer in Rule 12b-2 of
the Exchange Act. (Check one)

|Large accelerated filer [ ] | Accelerated filer [ x ] | Non-accelerated filer [ ]
|--------------------------- | ----------------------- | -------------------------

Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:

|U.S. GAAP [ ] | International Financial
      Reporting Standards as issued | Other [ x ]
|------------- | ----------------------------------------------------------- | -----------
|              | by the International Accounting
      Standards Board [ ]   |            

If Other has been checked in response to the previous
question, indicate by check mark which financial statement item the registrant
has elected to follow. Item 17[ ]Item 18 [ x ]

If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).[
]Yes[ x ]No

2

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EXPLANATORY
  NOTE

We are filing
  this Amendment No. 1 to our Annual Report on Form 20-F for the fiscal year ended
  January 31, 2011 originally filed with the Securities and Exchange Commission
  on May 9, 2011 (the ‘Original 2011 Form 20-F) to correct an administrative
  error in the Independent Auditor’s Report to the audited financial statements
  included in the Original 2011 Form 20-F. We have added the name of the independent
  auditor to the Independent Auditors Report and included it in this Amendment
  No. 1.

We are including
  in the Amendment No.1 currently-dated certifications by our principal executive
  officer and our principal financial officer. Other than as expressly set forth
  above, this Amendment No. 1 does not, and does not purport to, amend, update
  or restate the information in any other item of the Original 2011 Form 20-F,
  or reflect any events that have occurred after the Original 2011 Form 20-F was
  originally filed.

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TABLE OF CONTENTS

|Part I    |                                                                                       |       
|--------- | ------------------------------------------------------------------------------------- | ------
|          |                                                                                       |       
|ITEM 1.   | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS                                 | 1     
|ITEM 2.   | OFFER STATISTICS AND EXPECTED
      TIMETABLE                                         | 1     
|ITEM 3.   | KEY INFORMATION                                                                       | 2     
|ITEM 4.   | INFORMATION ON THE COMPANY                                                            | 10    
|ITEM 4A.  | UNRESOLVED STAFF COMMENTS                                                             | 27    
|ITEM 5.   | OPERATING AND FINANCIAL
      REVIEW AND PROSPECTS                                    | 27    
|ITEM 6.   | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                            | 40    
|ITEM 7.   | MAJOR SHAREHOLDERS AND RELATED
      PARTY TRANSACTIONS                               | 45    
|ITEM 8.   | FINANCIAL INFORMATION                                                                 | 48    
|ITEM 9.   | THE OFFER AND LISTING                                                                 | 50    
|ITEM 10.  | ADDITIONAL INFORMATION                                                                | 51    
|ITEM 11.  | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
      RISK                       | 59    
|ITEM 12.  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                                | 60    
|          |                                                                                       |       
|Part II   |                                                                                       |       
|          |                                                                                       |       
|ITEM 13.  | DEFAULT, DIVIDEND ARREARAGES AND DELINQUENCIES                                        | 60    
|ITEM 14.  | MATERIAL MODIFICATIONS TO
      THE RIGHT OF SECURITY HOLDERS AND USE OF **PROCEEDS** | **60**
|ITEM 15.  | CONTROLS AND PROCEDURES                                                               | 60    
|ITEM 16A. | **AUDIT COMMITTEE FINANCIAL
      EXPERT**                                            | 62    
|ITEM 16B. | **CODE OF ETHICS**                                                                    | 62    
|ITEM 16C. | **PRINCIPAL ACCOUNTANT FEES AND SERVICES**                                            | 62    
|          |                                                                                       |       
|Part III  |                                                                                       |       
|          |                                                                                       |       
|ITEM 17.  | FINANCIAL STATEMENTS                                                                  | 64    
|ITEM 18.  | FINANCIAL STATEMENTS                                                                  | 64    
|ITEM 19.  | EXHIBITS                                                                              | 65    

Financial Statements:

Managements Responsibility
        for the Financial Statements
      F-1Report of Independent Registered Public
        Accounting Firm
      F-2Consolidated Balance
        Sheet
      F-5Consolidated Statements of Loss, Other
        Comprehensive Loss and Deficit
      F-6Consolidated Statements
        of Shareholders Equity
      F-7Consolidated Statements of Cash Flows
      F-8Notes to Consolidates Financial Statements
      F-9


i

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This Annual Report on Form 20-F (this Annual Report) contains
statements that constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 as amended and Section 21E of the
Securities Exchange Act of 1934, as amended (the Exchange Act). These
statements appear in a number of different places in this Annual Report and can
be identified by words such as "expects", anticipates, "believes", "intends",
"estimates", potential, possible, "projects", "plans", and similar
expressions, or statements that events, conditions or results will, may,
could, or should occur or be achieved or their negatives or other comparable
words. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements that may expressed or implied by such forward-looking
statements. The statements, including the statements contained in Item 3D Risk
Factors, Item 4B Business Overview, Item 5 Operating and Financial Review
and Prospects and Item 11 Quantitative and Qualitative Disclosures About
Market Risk, are inherently subject to a variety of risks and uncertainties
that could cause actual results, performance or achievements to differ
significantly. Forward-looking statements include statements regarding the
outlook for our future operations, plans and timing for our exploration and
development programs, statements about future market conditions, supply and
demand conditions, forecasts of future costs and expenditures, the outcome of
legal proceedings, and other expectations, intentions and plans that are not
historical fact. Our actual results may differ materially from those in the
forward-looking statements due to risks facing us or due to actual facts
differing from the assumptions underlying our predictions. Some of these risks
and assumptions include:

- general economic and business conditions, including changes in interest
  rates and exchange rates;
- prices of natural resources, costs associated with mineral exploration and
  development, and other economic conditions;
- natural phenomena;
- actions by government authorities, including changes in government
  regulation;
- uncertainties associated with legal proceedings;
- changes in the resources market;
- future decisions by management in response to changing conditions;
- our ability to execute prospective business plans, and
- misjudgments in the course of preparing forward-looking statements.

All forward-looking statements included in this Annual Report
are based on information available to us on the date of this Annual Report. We
expressly disclaim any obligation to update publicly or otherwise these
statements, whether as a result of new information, future events or otherwise
except to the extent required by law. You should carefully review the cautionary
statements and risk factors contained in this and other documents that we file
from time to time with the Securities and Exchange Commission (the SEC).

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISORS

Not required.

ITEM 2. OFFER STATISTICS AND EXPECTED
TIMETABLE

Not required.

- 1 -

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ITEM 3. KEY INFORMATION

|A. | Selected Financial Data
|-- | -----------------------

The following selected financial information, as of and for the
years ended January 31, 2011, 2010 and 2009 have been derived from our audited
consolidated financial statements, which are included elsewhere in this Annual
Report. The selected financial data as of and for the years ended January 31,
2008 and 2007 have been derived from our audited consolidated financial
statements not included in this Annual Report. Our consolidated financial
statements are prepared in accordance with Canadian Generally Accepted
Accounting Principles ("GAAP"); the application of which conforms in all
material respects for the periods presented with United States (US) GAAP,
except as disclosed in the footnotes to the financial statements. The selected
financial data should be read in conjunction with the consolidated financial
statements and related notes thereto and other information included elsewhere in
the Annual Report.

We are in the process of transitioning to reporting under
International Financial Reporting Standards ("IFRS"). Our first quarter 2012,
ending April 30, 2011, will include comparative information under IFRS.

Selected Financial Data(US$ in 000s, except loss per share
and weighted average shares)

|                                              |   | Year        |   |   | Year        |   |   | Year        |   |   | Year        |   |   | Year        |  
|--------------------------------------------- | - | ----------- | - | - | ----------- | - | - | ----------- | - | - | ----------- | - | - | ----------- | -
|                                              |   | Ended       |   |   | Ended       |   |   | Ended       |   |   | Ended       |   |   | Ended       |  
|                                              |   | 1/31/11     |   |   | 1/31/10     |   |   | 1/31/09     |   |   | 1/31/08     |   |   | 1/31/07     |  
|Revenue                                       | $ |            |   | $ |            |   | $ |            |   | $ |            |   | $ |            |  
|Income (loss) from Operations                 | $ |            |   | $ |            |   | $ |            |   | $ |            |   | $ |            |  
|Net Loss                                      | $ | (7,283      | ) | $ | (9,023      | ) | $ | (5,523      | ) | $ | (4,124      | ) | $ | (18,126     | )
|Loss Per Share                                | $ | (0.05       | ) | $ | (0.06       | ) | $ | (0.04       | ) | $ | (0.03       | ) | $ | (0.16       | )
|Diluted Net Loss Per Share                    | $ | (0.05       | ) | $ | (0.06       | ) | $ | (0.04       | ) | $ | (0.03       | ) | $ | (0.16       | )
|Dividends Per Share                           | $ |            |   | $ |            |   | $ |            |   | $ |            |   | $ |            |  
|Weighted Average Shares                       |   | 149,444,955 |   |   | 139,456,827 |   |   | 137,187,927 |   |   | 133,697,572 |   |   | 114,754,213 |  
|Working Capital                               | $ | 779         |   | $ | 16,313      |   | $ | 3,582       |   | $ | 16,558      |   | $ | 5,240       |  
|Total Assets                                  | $ | 145,032     |   | $ | 139,648     |   | $ | 101,599     |   | $ | 88,485      |   | $ | 48,451      |  
|Long-Term and Convertible Debt                | $ | 29,408      |   | $ | 33,782      |   | $ | 24,006      |   | $ | 10,834      |   | $ | 11,853      |  
|US GAAP Long-Term and Convertible
      Debt1 | $ | 29,658      |   | $ | 34,032      |   | $ | 24,256      |   | $ | 10,834      |   | $ | 11,853      |  
|Shareholders Equity                          | $ | 102,618     |   | $ | 97,567      |   | $ | 70,335      |   | $ | 68,437      |   | $ | 29,658      |  
|US GAAP Shareholders Equity1                 | $ | 102,368     |   | $ | 97,317      |   | $ | 70,085      |   | $ | 68,437      |   | $ | 29,658      |  
|Capital Stock                                 | $ | 142,373     |   | $ | 132,066     |   | $ | 105,312     |   | $ | 104,615     |   | $ | 72,923      |  

|1 | Under Canadian GAAP, we include the fair value of the
      conversion ability as shareholders equity. Under US GAAP, this amount is
      included in convertible debt.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Unless otherwise indicated, all monetary amounts in this Annual
Report are expressed in United States dollars, our reporting currency.

- 2 -

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|D. | Risk Factors
|-- | ------------

Factors that could cause our actual results to differ
materially from those described in the forward-looking statements contained in
this Annual Report and other documents we file with the Securities and Exchange
Commission include the risks described below. You should also refer to the other
information in this Annual Report, including the consolidated financial
statements and accompanying notes thereto.

RISKS RELATING TO OUR BUSINESS

We may experience delays, higher than expected costs,
difficulties in obtaining environmental permits and other obstacles when
implementing our capital expenditure projects.

We are investing heavily in various facets of our NorthMet
Project. Our project is subject to a number of risks that may make it less
successful than anticipated, including:

- delays or higher than expected costs completing the environmental review
  process necessary before construction and operating permits can be issued;
- delays in the issuance of permits after completion of the environmental
  review process;
- delays or higher than expected costs in obtaining the necessary equipment
  or services to build and operate our projects, and
- adverse mining conditions may delay and hamper our ability to produce the
  expected quantities of minerals.

Our future activities could be subject to environmental laws
and regulations which may have a materially adverse effect on our future
operations, in which case our operations could be suspended or terminated.

We are subject to a variety of federal, provincial, state and
local statutes, rules and regulations designed to, among other things:

- protect the environment, including the quality of the air and water in the
  vicinity of exploration, development, and mining operations;
- remediate the environmental impacts of those exploration, development, and
  mining operations;
- protect and preserve wetlands and endangered species, and
- mitigate negative impacts on certain archeological and cultural sites.

We are required to obtain various governmental permits to
conduct exploration, development, construction and mining activities at our
properties. Obtaining the necessary governmental permits is often a complex and
time-consuming process involving numerous U.S. or Canadian federal, provincial,
state, and local agencies. The duration and success of each permitting effort is
contingent upon many variables not within our control. In the context of
obtaining permits or approvals, we must comply with known standards, existing
laws, and regulations that may entail greater or lesser costs and delays
depending on the nature of the activity to be permitted and the interpretation
of the laws and regulations implemented by the permitting authority. The failure
to obtain certain permits or the adoption of more stringent permitting
requirements could have a material adverse effect on our business, operations,
and properties and we may be unable to proceed with our exploration and
development programs.

Federal legislation and implementing regulations adopted and
  administered by the U.S. Environmental Protection Agency, Army Corp of Engineers,
  Forest Service, Bureau of Land Management, Fish and Wildlife Service, Mine Safety
  and Health Administration, and other federal agencies, and legislation such
  as the Federal Clean Water Act, Clean Air Act, National Environmental Policy
  Act, Endangered Species Act, and Comprehensive Environmental Response, Compensation,
  and Liability Act, have a direct bearing on U.S. exploration, development and
  mining operations. Due to the uncertainties inherent in the permitting process,
  we cannot be certain that we will be able to obtain required approvals for proposed
  activities at any of our properties in a timely manner, or that our proposed
  activities will be allowed at all.

- 3 -

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The process of obtaining federal and local regulatory approvals
  is increasingly cumbersome, time-consuming, and expensive, and the cost and
  uncertainty associated with the permitting process could have a material adverse
  effect on exploring, developing or mining our properties. Moreover, compliance
  with statutory environmental quality requirements described above may require
  significant capital outlays, significantly affect our earning power, or cause
  material changes in our intended activities. Environmental standards imposed
  by federal, state, or local governments may be changed or become more stringent
  in the future, which could materially and adversely affect our proposed activities.

Because the price of metals fluctuate, if the prices of
metals in our ore body decrease below a specified level, it may no longer be
profitable to develop our NorthMet Project for those metals and we will cease
operations.

Prices of metals are determined by some of the following
factors:

- expectations for inflation;
- the strength of the United States dollar;
- global and regional supply and demand, and
- political and economic conditions and production costs in major metals
  producing regions of the world.

The aggregate effect of these factors on metals prices is
impossible for us to predict. In addition, the prices of metals are sometimes
subject to rapid short-term and/or prolonged changes because of speculative
activities. The current demand for and supply of various metals affect the
prices of copper, nickel, cobalt, platinum, palladium and gold, but not
necessarily in the same manner as current supply and demand affect the prices of
other commodities. The supply of these metals primarily consists of new
production from mining. If the prices of copper, nickel, cobalt, platinum,
palladium and gold are, for a substantial period, below our foreseeable costs of
production, we could cease operations.

We are dependent on our key personnel.

Our success depends on key members of our management. The loss
of the services of one or more of such key management personnel could have a
material adverse effect us. Our ability to manage exploration and development
activities, and hence our success, will depend in large part on the efforts of
these individuals. We face intense competition for qualified personnel, and we
cannot be certain that we will be able to attract and retain such personnel.

We may not be able to raise the funds necessary to develop
our mineral properties. If we are unable to raise such additional funds, we will
have to suspend or cease operations.

We will need to seek additional financing to complete our
development and construction of the NorthMet Project. Sources of such external
financing include future equity offerings, advance payments by potential
customers to secure long-term supply contracts, grants and low-cost debt from
certain state financial institutions, and commercial debt secured by the
NorthMet Project. The failure to obtain such additional financing could have a
material adverse effect on our results of operations and financial condition. We
may not be able to secure the financing necessary to sustain exploration and
development activities in the future. If we cannot raise the money necessary to
continue to explore and develop our property, we will have to suspend or cease
operations.

Our metals exploration and development efforts are highly
speculative in nature and may be unsuccessful.

As a development stage company, our work is speculative and
involves unique and greater risks than are generally associated with operating
businesses.

- 4 -

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The development of mineral deposits involves uncertainties,
which careful evaluation, experience, and knowledge cannot eliminate. Although
the discovery of an ore body may result in substantial rewards, few properties
explored are ultimately developed into producing mines. It is impossible to
ensure that the current development program we have planned will result in a
profitable commercial mining operation. Significant capital investment is
required to achieve commercial production from successful exploration efforts.

We are subject to all the risks inherent to mineral
industry, which may have an adverse affect on our business operations.

We are subject to all of the risks inherent in the mining
industry, including, the following:

- Success in discovering and developing commercially viable quantities of
  minerals is the result of a number of factors, including the quality of
  management, the interpretation of geological data, the level of geological and
  technical expertise and the quality of land available for exploration;
- Exploration for minerals is highly speculative and involves substantial
  risks, even when conducted on properties known to contain significant
  quantities of mineralization, and most exploration projects do not result in
  the discovery of commercially mineable deposits of ore;
- Operations are subject to a variety of existing laws and regulations
  relating to exploration and development, permitting procedures, safety
  precautions, property reclamation, employee health and safety, air and water
  quality standards, pollution and other environmental protection controls, all
  of which are subject to change and are becoming more stringent and costly to
  comply with;
- A large number of factors beyond our control, including fluctuations in
  metal prices and production costs, inflation, the proximity and liquidity of
  precious metals and energy fuels markets and processing equipment, government
  regulations, including regulations relating to prices, taxes, royalties, land
  tenure, land use, importing and exporting of minerals and environmental
  protection, and other economic conditions, will affect the economic
  feasibility of mining;
- Substantial expenditures are required to construct mining and processing
  facilities;
- Title to mining properties may be subject to other claims, and
- In the development stage of a mining operation, our mining activities could
  be subject to substantial operating risks and hazards, including metal bullion
  losses, environmental hazards, industrial accidents, labor disputes,
  encountering unusual or unexpected geologic formations or other geological or
  grade problems, encountering unanticipated ground or water conditions, cave-
  ins, pit-wall failures, flooding, rock falls, periodic interruptions due to
  inclement weather conditions or other unfavorable operating conditions and
  other acts of God. Some of these risks and hazards are not insurable or may be
  subject to exclusion or limitation in any coverage which we obtain or may not
  be insured due to economic considerations.

As a result of all of these factors, we may run out of money,
in which case we will have to suspend or cease operations.

Our actual mineral reserves and mineral resources may not
conform to our established estimates.

The figures for mineral reserves and mineral resources stated
in this Annual Report are estimates and no assurances can be given that the
anticipated tonnages and grades will be achieved or that the indicated level of
recovery will be realized. Market fluctuations and the prices of metals may
render reserves and mineral resources uneconomic. Moreover, short-term operating
factors relating to the mineral deposits, such as the need for the orderly
development of the deposits or the processing of new or different grades of ore,
may cause a mining operation to be unprofitable in any particular accounting
period.

- 5 -

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There is no assurance that any of our mineral resources, not
currently classified as mineral reserves, will ever be classified as mineral
reserves under the disclosure standards of the SEC.

Item 4.D of this Annual Report discusses our mineral resources
in accordance with Canadian National Instrument 43-101  Standards of Disclosure
for Mineral Projects (NI 43-101). Resources are classified as measured
resources, indicated resources and inferred resources under NI 43-101.
However, U.S. investors are cautioned that the SEC does not recognize these
resource classifications. There is no assurance that any of our mineral
resources, not currently classified as mineral reserves, will be converted into
mineral reserves under the disclosure standards of the SEC.

We have had no production history and we do not know if we
will generate revenues in the future.

While we were incorporated in 1981, we have no history of
producing minerals. We have not developed or operated any mines, and we have no
operating history upon which an evaluation of our future success or failure can
be made. We currently have no mining operations of any kind. Our ability to
achieve and maintain profitable mining operations is dependent upon a number of
factors, including our ability to either attract a partner to operate, or to
successfully build and operate mines, processing plants and related
infrastructure ourselves.

We are subject to all the risks associated with establishing
new mining. We may not successfully establish mining operations or profitably
produce metals at any of our properties. As such, we do not know if we will ever
generate revenues.

We have a history of losses which we expect will continue
for the future. If we do not begin to generate revenues or find alternate
sources of capital, we may either have to suspend or cease operations.

As a development stage company with no holdings in any producing mines, we continue to incur losses and expect to incur losses in the future. As of January 31, 2011, we had an accumulated deficit of $78.832 million. We may not be able to achieve or sustain profitability in the future. If we do not begin to generate revenues or find alternate sources of capital, we may either have to suspend or cease operations.

We may not have adequate or any insurance coverage for some
business risks that could lead to economically harmful consequences to us.

Our businesses are generally subject to a number of risks and
hazards, including:

- industrial accidents;
- railroad accidents;
- labor disputes;
- environmental hazards;
- electricity stoppages;
- equipment failure, and
- severe weather and other natural phenomena.

These occurrences could result in damage to, or destruction of,
  mineral properties, production facilities, transportation facilities, or equipment.
  They could also result in personal injury or death, environmental damage, waste
  of resources or intermediate products, delays or interruption in mining, production
  or transportation activities, monetary losses and possible legal liability.
  The insurance we maintain against risks that are typical in our business may
  not provide adequate coverage. Insurance against some risks (including liabilities
  for environmental pollution or certain hazards or interruption of certain business
  activities) may not be available at a reasonable cost or at all. As a result,
  accidents or other negative developments involving our mining, production or
  transportation facilities could have a material adverse effect on our operations.

- 6 -

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The mining industry is an intensely competitive industry,
  and we may have difficulty effectively competing with other mining companies
  in the future.

We face intense competition from other mining and producing
companies. In recent years, the mining industry has experienced significant
consolidation among some of our competitors, as a result these companies may be
more diversified than us. We cannot assure you that the result of current or
further consolidation in the industry will not adversely affect us.

In addition, because mines have limited lives we must
periodically seek to replace and expand our reserves by acquiring new
properties. Significant competition exists to acquire properties producing or
capable of producing copper, nickel and other metals.

If we are unable to successfully manage these risks, our growth
prospects and profitability may suffer.

We may be subject to risks relating to the global
economy.

Recent market events and conditions, including disruptions in
the international credit markets and other financial systems and the
deterioration of global economic conditions could impede our access to capital
or increase the cost of capital. Since 2008 the U.S. credit markets have
experienced a serious disruption due to, among other things, deterioration in
residential property values, defaults and delinquencies in the residential
mortgage market and a decline in the credit quality of mortgage backed
securities. These problems led to a slow-down in residential housing market
transactions, declining housing prices, delinquencies in non-mortgage consumer
credit and a general decline in consumer confidence. These conditions caused a
loss of confidence in the broader U.S. and global credit and financial markets
and resulting in the collapse of, and government intervention in, major banks,
financial institutions and insurers and creating a climate of greater
volatility, less liquidity, widening of credit spreads, a lack of price
transparency, increased credit losses and tighter credit conditions.
Notwithstanding various actions by the U.S. and foreign governments, concerns
about the general condition of the capital markets, financial instruments,
banks, investment banks, insurers and other financial institutions caused the
broader credit markets to further deteriorate and stock markets to decline
substantially.

These unprecedented disruptions in the current credit and
financial markets have had a significant material adverse impact on a number of
financial institutions and have limited access to capital and credit for many
companies. These disruptions could, among other things, make it more difficult
us to obtain, or increase its cost of obtaining capital and financing for its
operations. Our access to additional capital may not be available on terms
acceptable to it or at all.

We are also exposed to liquidity risks in meeting our operating
and capital expenditure requirements in instances where cash positions are
unable to be maintained or appropriate financing is unavailable. These factors
may impact our ability to obtain loans and other credit facilities in the future
and, if obtained, on terms favourable to us. If these increased levels of
volatility and market turmoil continue, our operations could be adversely
affected and the trading price of our shares could be adversely affected. As a
result of current global financial conditions, numerous financial institutions
have gone into bankruptcy or have been rescued by government authorities. As
such, we are subject to the risk of loss of its deposits with financial
institutions that hold our cash.

RISKS RELATED TO THE OWNERSHIP OF OUR SHARES

We may experience volatility in our share price.

Our common shares are listed for trading on the Toronto Stock
  Exchange and on the NYSE Amex. Our shareholders may be unable to sell significant
  quantities of our common shares into the public trading markets without a significant
  reduction in the price of the shares, if at all. The market price of our common
  shares may be affected significantly by factors such as changes in our operating
  results, the availability of funds, fluctuations in the price of metals, the
  interest of investors, traders and others in development stage public companies
  such as us and general market conditions. In recent years the securities markets
  have experienced a high level of price and volume volatility, and the market
  price of securities of many companies, particularly small capitalization development
  companies similar to us, have experienced wide fluctuations, which have not
  necessarily been related to the operating performances, underlying asset values,
  or the future prospects of such companies. There can be no assurance that future
  fluctuations in the price of our shares will not occur.

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A large number of shares will be eligible for future sale
  and may depress our share price.

Our shares that are eligible for future sale may have an
adverse effect on the price of our common shares. As of January 31, 2011 there
were 154,825,791 of our common shares outstanding. The average trading volume
for the three months prior to January 31, 2011 was approximately 113,000 shares
per day on the Toronto Stock Exchange and 519,000 shares per day on the NYSE
Amex. Sales of substantial amounts of our common shares, or a perception that
such sales could occur, and the existence of options or warrants to purchase
common shares at prices that may be below the then current market price of our
common shares, could adversely affect the market price of our common shares and
could impair our ability to raise capital through the sale of our equity
securities.

Your ownership interest, voting power and the market price
of our common shares may decrease because we have issued, and may continue to
issue, a substantial number of securities convertible or exercisable into our
common shares.

We have issued common shares and options, and warrants to
purchase our common shares to satisfy our obligations and fund our operations
(see Item 5.A). Since we currently do not have a source of revenue, we will
likely issue additional common shares, options, warrants or other securities
exercisable for or convertible into our common shares to raise money for our
continued operations or as non-cash incentives to our own and our subsidiaries'
directors, officers, and key employees. If conversions of warrants and/or
options into common shares or additional sales of equity occur, your ownership
interest and voting power in us will be diluted and the market price of our
common shares may decrease.

Under our 2007 Omnibus Share Compensation Plan (the Plan),
the aggregate number of our common shares that may be issuable pursuant to the
Plan may not at any time exceed the greater of (i) 10% of our issued and
outstanding common shares and (ii)18,592,888 common shares, representing 13.62%
of our outstanding common shares at the time of the approval of the Plan, of
which 4,640,000 common shares are reserved for issuance as awards other than
options. As of January 31, 2011 the aggregate number of Common Shares issuable
pursuant to the Plan was 13,952,888 shares. Our bonus share incentive plan (the
Bonus Plan) was established for our directors and key employees. Under the
Bonus Plan we may issue an additional 3,640,000 shares upon achieving certain
milestones.

Upon any issuances or exercise of options issued, the ownership
interests and voting power of existing shareholders may be further diluted.

We have a Shareholders Rights Plan Agreement and certain
employment and management contracts that contain provisions designed to
discourage a change of control.

A Shareholders Rights Plan between us and shareholders
effective as of June 27, 2007 and modified on June 17, 2008 and certain
employment and management agreements contain provisions that could discourage an
acquisition or change of control without our board of directors approval. Under
the Shareholders Rights Plan, if a shareholder individually or in concert with
other shareholders acquires 20% or more of our outstanding common shares without
complying with the Shareholders Rights Plan or without the approval of our
board of directors, all holders of record will have a right to receive one
common share for each common share owned. We have also entered into agreements
with certain key employees and officers that contain severance provisions in the
event of a take-over bid. The Shareholders Rights Plan and the preceding
agreements may make it more difficult for a third party to acquire control of
us, even if such a change of control is more beneficial to shareholders.

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Conflicts of Interest

Certain of our directors, officers or promoters are directors,
officers, significant shareholders or promoters of other U.S. and Canadian
publicly traded companies. As a result, potential conflicts of interest may
arise with respect to the exercise by such persons of their respective duties
for us. In the event that such a conflict of interest arises at a meeting of our
directors, a director who has such a conflict will abstain from voting for or
against the approval of such participation or such terms. In the appropriate
cases, we will establish a special committee of independent directors to review
a matter in which several directors, or management, may have a conflict. Other
than as indicated, we have no other procedures or mechanisms to deal with
conflicts of interest. We are not aware of any conflicts of interest at the
present time.

Because we believe that we will be classified as a passive
foreign investment company (a PFIC), U.S. holders of our common shares may be
subject to United States federal income tax consequences that are worse than
those that would apply if we were not a PFIC.

Because we believe that we will be classified as a passive
foreign investment company, U.S. holders of our common shares may be subject to
United States federal income tax consequences that are worse than those that
would apply if we were not a PFIC, such as ordinary income treatment plus a
charge in lieu of interest upon a sale or disposition of our common shares even
if the shares were held as a capital asset. See Certain United States Federal
Income Tax Consequences.

Absence of Dividends

We have never declared or paid cash dividends on our common
shares and do not anticipate doing so in the foreseeable future. There can be no
assurance that our board of directors will ever declare cash dividends, which
action is exclusively within its discretion. Investors cannot expect to receive
a dividend on our common shares in the foreseeable future, if at all.

Increased Costs and Compliance Risks as a Result of Being a
Public Company

Legal, accounting and other expenses associated with public
company reporting requirements have increased significantly in the past few
years. We anticipate that general and administrative costs associated with
regulatory compliance will continue to increase as a result of governance
requirements, including requirements under the Sarbanes-Oxley Act of 2002, as
well as new rules implemented by the SEC, Canadian Securities Administrators and
the TSX. We expect these rules and regulations to significantly increase its
legal and financial compliance costs and to make some activities more time
consuming and costly. There can be no assurance that we will continue to
effectively meet all of the requirements of these regulations, including
Sarbanes-Oxley Section 404 and Canadian National Instrument 52-109  Financial
Disclosure (NI 52-109). Any failure to effectively implement new or improved
internal controls, or to resolve difficulties encountered in their
implementation, could harm our operating results, cause us to fail to meet
reporting obligations or result in management being required to give a qualified
assessment of our internal controls over financial reporting or our independent
registered public accounting firm providing an adverse opinion regarding
managements assessment. Any such result could cause investors to lose
confidence in our reported financial information, which could have a material
adverse effect on our share price. We also expect these rules and regulations
may make it more difficult and more expensive for us to obtain director and
officer liability insurance, and it may be required to accept reduced policy
limits and coverage or incur substantially higher costs to obtain the same or
similar coverage. As a result, it may be more difficult for us to attract and
retain qualified individuals to serve on our board of directors or as executive
officers. If we fail to maintain the adequacy of our internal controls, our
ability to provide accurate financial statements and comply with the
requirements of the Sarbanes-Oxley Act and/or MI 52-109 could be impaired, which
could cause our share price to decrease.

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ITEM 4. INFORMATION ON THE COMPANY

|A. | History and Development of the
  Company
|-- | ----------------------------------------

PolyMet Mining Corp. was incorporated under the British
Columbia Companies Actand continued under the Business Corporations
Act(British Columbia) in British Columbia, Canada on March 4, 1981, under
the name Fleck Resources Ltd., which we changed to PolyMet Mining Corp. on June
10, 1998.

Our principal executive office is situated at Suite 390  3600
Lysander Lane, Richmond, B.C. V7B 1C3. Our phone number is (604) 248-0939. Our
registered and records office is located at our legal counsels offices situated
at 2500  700 West Georgia Street, Vancouver, B.C. V7Y 1B3, Canada. Our
operational headquarters are located at P.O. Box 475, 6500 County Road 666, Hoyt
Lakes, Minnesota 55750-0475, United States.

We are a reporting issuer in the following Canadian provinces:
Alberta, British Columbia, and Ontario. Our common shares have been listed on
the Toronto Stock Exchange (TSX) since February 1, 2007 and, formerly, on the
TSX Venture Exchange (TSX-V) (formerly the Vancouver Stock Exchange) from April
13, 1984 to January 31, 2007 under the symbol "POM" and since June 26, 2006 our
common shares have been listed on the NYSE Amex (formerly the American Stock
Exchange) under the symbol PLM.

Our registrar and transfer agent is Computershare Investor
Services Inc. of 9th Floor, 100 University Avenue, Toronto, Ontario M5J 2Y1,
Canada.

During the years ended January 31, 2011, 2010, and 2009 we
spent $16.519 million, $17.754 million, and $22.776 million, respectively to
acquire property, advance the environmental review, and perform work following
completion of our Definitive Feasibility Study on our NorthMet Project located
in Minnesota, USA.

All of these expenses were incurred at our NorthMet Project and
were funded from the proceeds of equity and convertible debt financings. Since
completion of Definitive Feasibility Study in September 2006, these expenditures
and the Erie Plant acquisition have been capitalized.

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|B. | Business Overview
|-- | -----------------

We are a development stage company engaged in the exploration
and development of natural resource properties. Currently our sole mineral
property is the NorthMet Project, a polymetallic deposit located in northeastern
Minnesota, USA.

In the years ended January 31, 2011, 2010 and 2009, we
conducted exploration, development and acquisition activities only and did not
conduct any operations that generated revenues. Thus, we rely principally on
equity or debt convertible into equity financings to fund our projects and
expenditures.

Since 2003, we have focused on commencing commercial production
on our NorthMet Project. We have focused our efforts on four main areas:

Acquisition of the Erie Plant.
The Erie Plant is a large processing facility and associated infrastructure
located approximately six miles west of our NorthMet deposit. On November 15,
2005 and December 20, 2006 we entered into a total of three Contracts for Deed
with Cliffs Erie LLC, a subsidiary of Cliffs Natural Resources Inc. (formerly
Cleveland Cliffs, Inc.) of Cleveland, Ohio (Cliffs), under which we now own a
large processing facility, a tailings disposal facility, and extensive
associated infrastructure located approximately six miles west of our NorthMet
deposit. In combination, the Erie Plant includes a 100,000 ton-per-day crushing
and milling facility, a railroad and railroad access rights connecting the Erie
Plant to the NorthMet deposit, as well as 120 railcars, locomotive fueling and
maintenance facilities, water rights and pipelines, large administrative offices
on site and approximately 6,000 acres to the east and west of the Erie Plant,
contiguous to the existing tailing facilities.

Environmental and permitting. To
commence commercial production at NorthMet, various regulatory approvals are
needed. In October 2005, the Minnesota Department of Natural Resources ("MDNR")
published its Environmental Assessment Worksheet Decision Document establishing
the MDNR as the lead state agency and the US Army Corps of Engineers (USACE")
as the lead federal agency (together the Lead Agencies) for preparation of an
Environmental Impact Statement (EIS) for the project.

In October 2009, the Lead Agencies
published the PolyMet Draft EIS, which marked that start of a period for public
review and comment that ended on February 3, 2010. During this period, the Lead
Agencies held two public meetings and received more than 3,700 submissions
containing approximately 22,000 separate comments, including an extensive
comment letter from the US Environmental Protection Agency (EPA) in its role
as reviewer of projects that could impact the environment.

On June 25, 2010 the Lead Agencies
announced that they intended to complete the EIS process by preparing a
Supplemental Draft EIS that incorporates a proposed land exchange with the US
Forest Service ("USFS") Superior National Forest and expands government agency
cooperation. The USFS joined the USACE as a federal co-lead agency through the
completion of the EIS process. In addition, the EPA has joined the effort as a
cooperating agency. The MDNR remains the state co-lead agency.

On October 13, 2010 the USACE and the
USFS published a Notice of Intent to complete the Supplemental Draft EIS, which
will:

- Supplement and supersede the Draft EIS and respond
  to concerns identified by the US EPA and other comments on the Draft EIS, and
- Incorporate potential effects from the proposed
  land exchange between the USFS Superior National Forest and PolyMet.

Once the Supplemental Draft EIS is completed,
  it will be made available for public review prior to preparation of the Final
  EIS. Completion of the Final EIS and a subsequent Adequacy Decision by the MDNR
  and Record of Decision by the federal agencies are necessary before the land
  exchange can occur and various permits required to construct and operate the
  NorthMet Project can be issued.

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Prior to receipt of these permits, we
  intend to secure production debt financing that would be available upon receipt
  of key permits, with construction slated to start upon availability of construction
  finance.

Engineering and feasibility. We
retained Bateman Engineering Pty. of Brisbane, Australia (Bateman) as the
coordinating consultant to prepare a Definitive Feasibility Study (the DFS).
In September 2006 we reported that the DFS confirmed the economic and technical
viability of our NorthMet Project.

Bateman was responsible for completing
the process design and detail engineering and cost estimates for the plant and
infrastructure. This work was supported by other firms that provided
geo-statistical reviews of the ore body, mine planning and scheduling of ore and
waste, and assessment of the market for the metals and intermediate products
planned to be produced.

Since September 2006 we have completed
additional drilling and expanded the reserves. In May 2008 we completed an
internal update of the DFS (the DFS Update) which contemplates an initial
stage in which we would sell concentrate during completion of construction and
commissioning of the hydrometallurgical plant that was contemplated in the DFS.
This approach has the advantage of staging capital costs so that the
hydrometallurgical plant can be funded in part from cash flow from sales of
concentrate, and it reduces our reliance on delivery of long lead-time equipment
before we start commercial production.

In February 2011 we announced that we
plan to build the NorthMet Project in two phases, the first to produce and
market concentrates containing copper, nickel, cobalt and precious metals, and
the second to process the nickel concentrate through a single autoclave,
resulting in production and sale of high grade copper concentrate, value added
nickel-cobalt hydroxide, and precious metals precipitate products.

Financing and corporate
development. Since 2003 we have raised approximately $115 million from
equity private placement financings.

In October 2008, we entered into a
strategic partnership with Glencore AG (Glencore) whereby Glencore agreed (i)
to purchase up to $50 million of our floating rate secured debentures, of which
$25 million has been issued, which are exchangeable into our common shares, and
(ii) to purchase all of our production of concentrates, metal, or intermediate
products on market terms at the time of delivery, for at least the first five
years of production. We also appointed a senior technical representative of
Glencore to join our Technical Steering Committee and another officer of
Glencore, Stephen Rowland, was appointed to our Board of Directors.

$7.5 million of the Debentures were
issued in October 2008, $7.5 million were issued in December 2008, $5.0 million
were issued in June 2009, and $5 million were issued in August 2009. The final
$25 million was not issued.

In November 2009 we entered into an
agreement with Glencore whereby, in two installments, Glencore purchased $25
million of our common shares at $2.65 per share.

In November 2010, we entered into a
further agreement with Glencore whereby Glencore agreed to purchase 15 million
shares of our common stock at $2.00 per share in three tranches over the next
two years. In addition, Glencore agreed to extend the maturity date of the $25
million (initial principal) debentures issued to Glencore under the 2008
financing to September 30, 2012 and cancelled the final $25 million debenture
financing commitment and the 6.25 million share purchase warrants issued as part
of the 2008 financing. We issued warrants to purchase 3 million shares at $2.00
per share at any time until December 31, 2015 as compensation for the other
changes. On January 17, 2011 Glencore funded the first $10 million tranche of
the November 2010 financing agreement and we issued 5 million of our common
shares to Glencore.

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At our annual shareholders' meeting on
July 7, 2010, Messrs. Corneliuson and Swearingen did not stand for re-election
to our Board of Directors owing to personal commitments. Effective December 31,
2010, Mr. Murray stepped down as Executive Chairman and Mr. Molyviatis resigned
from our Board. Mr. Murray continues to serve as a non-management director.
Messrs. Forrest and Sims, both independent directors, now serve as our
independent co-Chairmen. Mr. Forrest continues as Chair of the Audit and
Compensation Committees and Mr. Sims continues as Chair of the Corporate
Governance Committee.

|C. | Organizational Structure
|-- | ------------------------

Poly Met Mining, Inc., incorporated in Minnesota, USA on
February 16, 1989, is our only material wholly owned operating subsidiary.

|D. | Property, Plant and
Equipment
|-- | -----------------------------

Property - NorthMet Project, Minnesota, USA

Our primary mineral property is the NorthMet Project, a
polymetallic project located in northeastern Minnesota, USA. Our Erie Plant
facility is located approximately six miles west of the NorthMet ore body.

In the years ended January 31, 2011, 2010 and 2009, we
conducted exploration, development and acquisition activities only and did not
conduct any operations.

|(a) | History
|--- | -------

The NorthMet Project is located immediately south of the
eastern end of the historic Mesabi Iron Range in northeastern Minnesota. Mining
in the Iron Range dates back to the 1880s when high grade iron ore known as
hematite was first mined commercially. During the 1940s and 1950s, with
reserves of hematite dwindling, the iron industry began to focus on taconite, a
lower-grade iron ore. Eight large crushing, grinding, milling and pelletizing
facilities were built by various iron and steel companies to process the
taconite, including the Erie Plant that we acquired in November 2005.

In the 1940s, copper and nickel were discovered nearby,
following which, in the 1960s, United States Steel Corporation (US Steel)
drilled what is now our NorthMet property. US Steel investigated the deposit as
a high-grade, underground copper-nickel resource, but considered it to be
uneconomic based on its inability to produce separate, clean nickel and copper
concentrates with the metallurgical processes available at that time. In
addition, prior to the development of the autocatalyst market in the 1970s,
there was little market for platinum group metals (PGMs) and there was no
economic and reliable method to assay for low grades of these metals.

In 1987, the Minnesota Natural Resources Research Institute
(NRRI) published data suggesting the possibility of a large resource of PGMs
in the base of the Duluth Complex. In 1989, we acquired a 20-year renewable
mining lease over the property from US Steel and commenced an investigation into
the potential for mining and recovery of copper, nickel, and PGMs. We re-assayed
pulps and rejects from the previous US Steel drilling to obtain data on the
PGMs. Sequentially we entered into joint venture agreements with Nerco and
Argosy Mining, which assisted in identifying and quantifying potential PGM
values. However, the challenge of producing separate concentrates of saleable
copper and nickel remained.

In the mid-90s, we began investigating the use of alternative
metallurgical processes, including bio-leaching and pressure oxidation. In 1998
we focused on a hydrometallurgical technology that uses autoclaves, which are
vessels operating at high temperature, high pressure, and in an oxygen-enriched
environment, to oxidize the sulfidic ores and leach the metals therein. This
technology was developed in the 1950s and has been used commercially in the
copper, nickel, cobalt, and gold mining industries since the 1980s.

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In July 2000, we entered into a joint venture arrangement with
North Limited (North), a major Australian mining company, to advance the
NorthMet Project to commercial production. Under the joint venture arrangement,
North had the opportunity to earn an 87.5% interest in the NorthMet Project by
producing a feasibility study and funding 100% of the total capital costs to
develop the project.

In August 2000, Rio Tinto Limited (Rio Tinto) acquired North.
Subsequently, Rio Tinto decided not to proceed with the NorthMet Project and we
exercised our 30-day pre-emptive right, under a change of control clause, to
terminate the joint venture arrangement. As a result, we regained a 100%
interest in the NorthMet Project.

Following completion of metallurgical pilot plant work in
November 2000, we commissioned a pre-feasibility study on the project that was
completed in April 2001. The pre-feasibility study contemplated a 50,000 metric
tonne-per-day (55,000 short tpd) operation and anticipated the construction of a
new, stand-alone processing plant to produce copper, nickel and cobalt metals on
site. The study found the economics of the NorthMet Project were unacceptably
low owing to the capital cost of building a new plant facility combined with low
metal prices prevailing at that time. No further work was done until March 2003,
when a new management team took over our company and commenced a detailed review
of the project.

The new management team believed that acquisition of the Erie
Plant had the potential to substantially reduce the capital cost and to simplify
the permitting process which could improve the project economics.

By a Memorandum of Understanding dated December 5, 2003 and an
option agreement dated February 14, 2004, we obtained an option (the Cliffs
Option) to acquire certain property, plant, and equipment (Cliffs Assets)
from Cliffs Erie LLC, a wholly owned subsidiary of Cliffs, located near our
NorthMet Project. As consideration for the Cliffs Option, we paid $500,000 prior
to January 31, 2004 and issued to Cliffs 1,000,000 shares of our common stock on
March 30, 2004, valued at $229,320 to maintain our exclusive rights until June
30, 2006. On September 15, 2005 we reached an agreement with Cliffs on the terms
for the early exercise of our option to acquire 100% ownership of large portions
of the former LTV Steel Mining Company ore processing plant in northeastern
Minnesota (the Asset Purchase Agreement). Under this agreement we agreed to
pay Cliffs $1 million in cash, 6.2 million of our shares, and make quarterly
payments of $250,000 starting on March 31, 2006 for a total of $2.4 million plus
interest at 4% per annum on the outstanding balance. The final payment was made
on June 30, 2008.

On November 15, 2005, we consummated the Asset Purchase
Agreement and completed the acquisition thereunder. The property, plant, and
equipment assets we now own includes land, crushing and milling equipment,
extensive spare parts, plant site buildings, real estate, tailings impoundments
and workshops, as well as access to extensive mining infrastructure.

On September 14, 2006, we entered into an agreement through two
separate contracts for deed with Cliffs whereby we would acquire property and
associated rights (Cliffs II.) We closed the transaction on December 20, 2006.
The transaction provides us with a railroad connection linking the mine
development site and the Erie Plant as well as a 120-railcar fleet, locomotive
fueling and maintenance facilities, water rights and pipelines, large
administrative offices on site and approximately 6,000 acres to the east and
west of and contiguous to our existing tailings facilities.

The purchase price for this additional infrastructure consisted
of 2 million of our common shares and US$15 million in cash to be issued and
paid in four tranches:

- 2 million of our common shares;
- $1 million in cash was paid at closing;
- $7 million in cash is payable in quarterly installments of $250,000
  commencing December 31, 2006 with the balance payable upon receipt of
  commercial financing. Interest on the outstanding amount is payable quarterly
  from December 31, 2006 at the Wall Street JournalPrime Rate. As of
  March 31, 2011 the remaining balance was $2.5 million; and

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- $7 million in cash is payable in quarterly installments of $250,000
  commencing on December 31, 2009 with a balloon payment of any unpaid balance
  due on December 31, 2011. Interest began to accrue on the outstanding amount
  beginning on December 31, 2009 and is now payable quarterly at the Wall
  Street JournalPrime Rate. As of March 31, 2010 the remaining balance was
  $5.5 million.

We also assumed certain liabilities associated with the
property.

As of January 31, 2011, we have expended $130 million primarily
on the acquisition of the Erie Plant and related infrastructure. Under the Asset
Purchase Agreement we have paid $3.4 million plus interest and owe Cliffs $nil.
Under Cliffs II we have paid $5.5 million plus interest and owe $8.5
million.

Since inception, we have a cumulative deficit of $78.8 million,
much of which has been incurred directly and indirectly in connection with our
NorthMet Project. These expenditures supported drilling, sampling, assaying,
environmental, metallurgical testing, and the pre-feasibility studies.

The following diagram illustrates the location of the NorthMet
Project.

Figure No. 1 NorthMet Project Map



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|(b) | Location / Access /
Climate
|--- | ---------------------------

The NorthMet Project covers a total of 16,700 acres or 25.9
square miles comprising two areas: the NorthMet mine site totaling approximately
4,300 acres or 6.5 square miles of leased mineral rights and the Erie Plant site
totaling 12,400 acres of freehold land located approximately six miles west of
the mine site. The property is located in St. Louis County in the Mesabi Range
District about 60 miles north of Duluth, Minnesota. The NorthMet Project is
easily accessible via state and county roads. The surfaced County Highway 666
links the plant to the town of Hoyt Lakes, itself approximately 25 miles east of
Virginia, Minnesota which is located on State Highway 53. The mine site is
accessible by an all-season gravel road from the plant site and a private
railroad crosses the property immediately south of the deposit and runs to the
plant site. The plant site is serviced by commercial railroad which connects
into the US national and Trans-Canadian railroad systems, as well as a private
railroad providing access to port facilities located on Lake Superior. Three
high-voltage power lines owned by Minnesota Power supply the plant site and
there is ready access to industrial electric power at the mine site.

The northern Minnesota climate is continental, characterized by
wide variations in temperature. The temperature in the nearby town of Babbitt
averages -14oC (7oF) in January and 19oC (66oF) in July. The average annual
precipitation is 28 inches with approximately 30% during the months from
November to April and 70% from May through October.

|(c) | Claims and ownership
|--- | --------------------

| | (i) | NorthMet Leases
| | --- | ---------------

Pursuant to two lease agreements, we lease certain lands
covering 4,282 acres or 6.5 square miles located in St. Louis County, Minnesota,
known as the NorthMet Project:

- Pursuant to an agreement dated January 4, 1989, subsequently amended and
  assigned, we lease 4,162 acres from RGGS Land & Minerals Ltd., L.P
  (RGGS). During the year ended January 31, 2005, US Steel assigned the lease
  to RGGS. The initial term of the renewable lease was 20 years and called for
  total lease payments of $1.450 million. We can indefinitely extend the 20-year
  term by continuing to make $150,000 annual lease payments on each successive
  anniversary date. All lease payments have been paid or accrued to January 31,
  2011.We can, at our option, terminate the lease at any time by giving
  written notice to the lessor not less than 90 days prior to the effective
  termination. The lease payments are considered advance royalty payments and
  will be deducted from future production royalties payable to RGGS, which range
  from 3% to 5% based on the net smelter return that we receive. Our recovery of
  the advance royalty payments is subject to the lessor receiving an amount not
  less than the amount of the annual lease payment due for that year.
- Pursuant to an agreement effective December 1, 2008, we lease 120 acres
  that are encircled by the RGGS property from LMC Minerals (LMC). The initial
  term of the renewable lease is 20 years and calls for minimum annual lease
  payments of $3,000 on each successive anniversary date until our project
  commences commercial production, or for the first four years, whichever is the
  shorter, after which the minimum annual lease payment increases to $30,000.
  The initial term may be extended for up to four additional five-year periods
  on the same terms. All lease payments have been paid to January 31,
  2011.The lease payments are considered advance royalty payments and
  will be deducted from future production royalties payable to LMC, which range
  from 3% to 5% based on the net smelter return that we receive. Our recovery of
  the advance royalty payments is subject to the lessor receiving an amount not
  less than the amount of the annual lease payment due for that year.

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| | (ii) | The Erie Plant
| | ---- | --------------

The Erie Plant As set forth under the Asset Purchase
Agreement, we have assumed certain ongoing site-related environmental and
reclamation obligations of Cliffs in connection with the Erie Plant. Once we
obtain our permit to mine and Cliffs is released from its obligations by certain
state agencies, we will be directly obligated to comply with applicable
environmental and reclamation obligations. Prior to Cliffs' acquisition of the
plant from LTV Steel and prior to our acquisition of the plant from Cliffs, both
Cliffs and we undertook environmental assessments and concluded that there were
no material liabilities other than the ultimate closure and reclamation of the
site. Until operating permits are granted to us, Cliffs remains the Regulated
Party for such obligations although, as part of the Asset Purchase Agreement,
we have indemnified Cliffs for such costs.

The Erie Plant comprises a large crushing, grinding and milling
facility that was built by a consortium of steel companies in the mid-1950s and
processed low grade iron ore known as taconite that was transported to the
facility by railroad from nearby mines. In the mid-1980s, the consortium was
consolidated into a single owner  LTV Steel. Pickands-Mather and its successor
Cliffs operated the plant on behalf of the owners, processing approximately
100,000 tons per day of taconite ore. The plant was shut down in 2001 when LTV
Steel filed for bankruptcy protection. Since then it has been maintained
initially by Cliffs and, since November 15, 2005, by us. The plant did not
operate during the period ended January 31, 2011.

The plant is located approximately six miles west of our
NorthMet ore body, about five miles north-northwest of the town of Hoyt Lakes,
itself located about 25 miles west of Virginia, Minnesota. The plant site covers
approximately 12,400 acres, or 19.4 square miles, and is powered by electricity
from local power lines.

The plant facilities include two rail dump pockets, two primary
60 gyratory crushers, eight secondary 36 gyratory crushers, seven tertiary
seven-foot standard cone crushers, 14 seven-foot short-head crushers, 30 mill
circuits each comprising one 12x 14' rod mill and one 12x 14' ball mill, three
12'x 24' regrind mills, maintenance facilities and spare parts, extensive
conveyors, feeders, bins, auxiliary facilities and offices, established
infrastructure including a 225 MVA high voltage electrical substation, water
supply, roads, tailings basins and rail facilities.

With the completion of Cliffs II, we also own a 120-railcar
fleet, locomotive fueling and maintenance facilities, water rights and
pipelines, and large administrative offices on site.

Until the plant was closed in 2001, Cliffs had undertaken
numerous programs to update and modernize control systems. The plant is
generally in good physical condition and was operating at or near full capacity
prior to its closure. We are not yet utilizing the Erie Plant but we have
examined the plant in detail and have restarted certain pieces of equipment and
believe it to be serviceable.

We plan to use approximately one-third of the historic
productive capacity to crush and grind material that we expect to mine from the
NorthMet deposit. We intend to construct new facilities to recover copper metal,
nickel and cobalt hydroxides, and precious metal precipitates.

On January 28, 2010, Cliffs received a notice of intent to sue
pursuant to Section 505 of the Clean Water Act on behalf of the Center for
Biological Diversity, Save Lake Superior Association and the Indigenous
Environmental Network. Pursuant to the notice, these environmental groups
intended to file a lawsuit in Federal court for alleged violations by Cliffs
Erie of National Pollutant Discharge Elimination System ("NPDES") permits at
three separate locations on the Cliffs Erie property. On March 25, 2010 Cliffs
entered a consent decree under which it is obligated to proceed with both short-
and long-term mitigation of the alleged violations. As the indemnifying party,
we are working closely with Cliffs on fulfillment of Cliffs obligations under
the consent decree.

As of January 31, 2011 we estimate the total indemnification
  liability (including the additional liabilities associated with the consent
  decree) to be approximately $28.2 million and, based on the expected timing
  of such payments, our cost of capital, and anticipated inflation rates, we made
  a provision of $3.8 million in our financial statements at that date.

- 17 -

---

|(d) | Permitting and
Environmental
|--- | ----------------------------

We commenced the environmental review and permitting process in
early 2004. In October 2005, the MDNR published its Environmental Assessment
Worksheet Decision Document establishing the MDNR as the lead state agency and
the USACE as the lead federal agency (together the Lead Agencies) for
preparation of an EIS for the project. In 2006 these Lead Agencies selected an
independent environmental contractor (the EIS Contractor) to prepare the EIS.
The EIS Contractor is Environmental Resources Management, a leading global
provider of environmental, health and safety, risk, and social consulting
services. The EIS Contractor team included members with expertise and experience
in mining sulfidic ores. Several other government agencies (including the USFS,
the Bois Forte Band of Chippewa and the Fond Du Lac Band of Lake Superior
Chippewa) joined the EIS preparation team as Cooperating Agencies, which brought
their special expertise to the process.

In January 2007, we submitted a Detailed Project Description
(DPD) to state and federal regulators. The DPD laid out our development plans
and proposed environmental safeguards including a mine plan, a wetland
mitigation plan, air and water quality monitoring plans and a closure plan with
closure estimate. Since then, we have submitted a supplemental DPD as well as
more than 100 supporting research studies, including comprehensive mine waste
characterization studies, water quality modeling and air quality modeling.

Under state and federal guidelines and regulations, a Draft EIS
identifies the environmental impact of a proposed project as well as evaluating
alternatives and ways to mitigate potential impacts. We were involved in the
process of alternative/mitigation development and had input into the technical
and economical feasibility of potential alternatives and mitigations. The EIS
Contractor prepared a series of preliminary versions of the Draft EIS that were
reviewed and commented on by the Lead Agencies, other governmental agencies, and
PolyMet.

In October 2009, the Lead Agencies published the PolyMet Draft
EIS with formal notification of publication in the Minnesota Environmental
Quality Board (EQB) Monitor and the Federal Register on November 2 and
November 6, 2009, respectively. The formal notification of publication started a
90-day period for public review and comment, which ended on February 3, 2010.
During this period, the lead Agencies held two public meetings  one in the town
of Aurora, MN near the project location and one in Blaine, MN in the
metropolitan Minneapolis-St. Paul area.

The Lead Agencies received more than 3,700 submissions
containing approximately 22,000 separate comments, including an extensive
comment letter from the EPA in its role as reviewer of projects that could
impact the environment.

On June 25, 2010 the Lead Agencies announced that they intended
to complete the EIS process by preparing a Supplemental Draft EIS that
incorporates a land exchange proposed with the USFS Superior National Forest
land exchange and expands government agency cooperation. The USFS joined the
USACE as a federal co-lead agency through the completion of the EIS process. In
addition, the EPA has joined the effort as a cooperating agency. The MDNR
remains the state co-lead agency.

On October 13, 2010 the USACE and the USFS published a Notice
of Intent to complete the Supplemental Draft EIS, which will:

- Supplement and supersede the Draft EIS and respond to concerns identified
  by the EPA and other comments on the Draft EIS, and
- Incorporate potential effects from the proposed land exchange between the
  USFS Superior National Forest and us.

Public review of the scope of the land exchange ended on November
  29, 2010. The Notice of Intent stated that the proposed land exchange would
  eliminate conflicts between the United States and private mineral ownership
  and consolidate land ownership to improve Superior National Forest management
  effectiveness and public access to federal lands. The proposed exchange is in
  accordance with Forest Service Strategic Plan Goals to provide and sustain long-term
  socioeconomic benefits to the American people, conserve open space, and sustain
  and enhance outdoor recreation activities.

- 18 -

---

The NorthMet mine site encompasses approximately 2,840 of the
  6,650 acres of land proposed for exchange to private ownership; the remaining
  federal property would improve intermingled and inefficient ownership patterns
  and eliminate conflicts if minerals development were to expand in the future.

The lands that would be received by the Superior National
Forest consist of forest and wetland habitat as well as lake frontage. These
lands would enhance public recreation opportunities and complement existing
federal ownership by eliminating or reducing private holdings surrounded by
Superior National Forest land.

On April 15, 2011 we reported that we and the Lead Agencies
expect to finalize detailed modeling work plans by early May, 2011. Once final
modeling confirms that the project meets state and federal standards required
for it to be permitted, the third party contractor hired by the DNR will prepare
a preliminary supplemental draft EIS, which will be reviewed by the lead
agencies, cooperating agencies (including the US Environmental Protection Agency
and tribal governments) and PolyMet, before being finalized for publication and
public comment. The lead agencies anticipate publishing the supplemental draft
EIS for public comment during the fall of 2011. A final EIS will incorporate
comments, after which a subsequent Adequacy Decision by the DNR and Record of
Decision by the federal agencies are necessary before the land exchange can
occur and various permits required to construct and operate the project can be
issued.

A number of permits will need to be issued by the MDNR, the
Minnesota Pollution Control Agency (PCA) and the USACE before construction can
begin - the major permits are:

U.S. Army Corps of Engineers

- Section 404 Individual Permit for Impacted Wetlands

Minnesota Department of Natural
Resources

- Permit to Mine
- Water Appropriations Permit
- Dam Safety Permit
- Wetland Replacement Plan

Minnesota Pollution Control
Agency

- National Pollutant Discharge Elimination System (NPDES) Permit (storm
  water)
- State Disposal System (SDS) Permit
- Air Emissions Permit

As of January 31, 2011, we had spent approximately $31.9
million on environmental review and permitting activities.

- 19 -

---

|(e) | History of Exploration
|--- | ----------------------

|Cautionary Note to United States Investors Concerning
      Estimates of Measured, Indicated and Inferred Resources                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|This section uses the terms measured resources,
      indicated resources, and inferred resources. We advise United States
      investors that while these terms are recognized and required by Canadian
      regulations (under National Instrument 43-101 - Standards of Disclosure
      for Mineral Projects (NI-43-101)), the SEC does not recognize them.
      United States investors are cautioned not to assume that any part or
      all of the mineral deposits in these categories will ever be
      converted to reserves.In addition, inferred resources have a great
      amount of uncertainty as to their existence and economic and legal
      feasibility. It cannot be assumed that all or any part of an Inferred
      Mineral Resource will ever be upgraded to a higher category. Under
      Canadian Rules, estimates of Inferred Mineral Resources may not form the
      basis of Feasibility or Pre-Feasibility Studies, or economic studies
      except for a Preliminary Assessment as defined under NI 43-101. United
      States investors are cautioned not to assume that part or all of an
      inferred resource exists, or is economically or legally
      mineable.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Important Notes and Assumptions Throughout.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|1.          
      The terms Mineral Resources and Reserves as used herein conform to the
      definitions contained in NI 43-101.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|2.          
      Reserves are contained within the envelope of Measured & Indicated
      Mineral Resource. Mineral Resources are not Reserves and do not
      have demonstrated economic viability.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|3.          
      Mineral Resources and Reserves have been calculated using the following
      metal prices: Copper - $1.25/lb, Nickel - $5.60 per pound, Cobalt -
      $15.25/lb, Palladium - $210 per ounce, Platinum - $800 per ounce
      and Gold - $400 per ounce.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|4.           
      Base Case economics for the purpose of the Technical Report to NI
      43-101standards are the weighted average of the three-year trailing
      (60%) and two-year forward (40%) market prices using July 31, 2006
      as a reference for the three-year trailing price and average forward
      prices during July 2006 for forward prices. Specifically, these
      prices are: Copper - $2.25/lb, Nickel - $7.80 per pound, Cobalt -
      $16.34/lb, Palladium - $274 per ounce, Platinum - $1,040 per ounce and
      Gold - $540 per ounce.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|5.          
      The copper equivalent grade is calculated by multiplying the grade of
      each metal by the metal price (in the same units) used in reserve
      and resource modeling (see note 3) and dividing the product by the
      copper price.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|6.          
      The Net Metal Value (NMV) is calculated by summing the product of the
      grade of each metal, the metal price (in the same units) used in
      reserve and resource modeling (see note 3), the expected metal
      recovery, and the expected payment terms.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

Prospectors first discovered copper and nickel near Ely,
Minnesota about 20 miles north of NorthMet in the 1940s. Subsequently, the Bear
Creek Mining Company conducted a regional exploration program resulting in the
discovery of the Babbitt deposit (northeast of NorthMet). US Steel began an
exploration program in the Duluth Complex in the late 1960s and over the next
few years drilled 114 core holes into the NorthMet property (then called Dunka
Road).

From 1998 to present, we have conducted a series of drilling
programs totaling 271 holes for approximately 162,000 feet of core and reverse
circulation drilling. These holes, combined with earlier drilling by US Steel,
bring the total to 418 diamond and reverse circulation holes aggregating to
approximately 318,000 feet. In addition, we have meticulously recompiled all
prior work started by US Steel in 1969. We have also recently drilled an
additional 37 holes totaling approximately 6,300 feet of tightly-spaced grid
drilling for detailed mine planning.

- 20 -

---

Mineral Resources and Reserves

Within the overall mineralized envelope defined by these
exploration programs, the 2006 DFS defined measured and indicated mineral
resources above the 500-foot elevation (approximately 1,120 feet below surface.)
On August 9, 2007 we reported that measured and indicated mineral resources at
the NorthMet Project had increased by 51% to 638 million short tons from the 422
million short tons reported in the DFS. The revised mineral resource estimates
are based on the same cut-off grades used in the DFS namely a Net Metal Value
(NMV) of US$7.42 per ton, reflecting mine planning at a copper price of
US$1.25 per pound and a nickel price of US$5.60 per pound  see notes to the
following table.

The increase in mineral resources reflects two changes:

- Data from the calendar 2007 drill program which confirmed the continuity of
  the main mineralized zone and the size of the Magenta Zone, which was extended
  down dip and to the west. These changes contributed 149 million short tons to
  the increase in measured and indicated mineral resources.
- Extension of the overall mineral envelope to approximately 1,620 feet below
  surface (0  elevation), compared with the prior cutoff at approximately
  1,120 feet below surface (500  elevation). This change contributed 67
  million short tons to the increase in measured and indicated mineral
  resources.

As a result, measured and indicated mineral resources have
increased by 216 million short tons to 638 million short tons and inferred
mineral resources have been expanded to 252 million short tons from 121 million
short tons  all on the DFS cut-off grade. Details of the mineral resources are
set out in the following table.

|Updated Mineral Resources compared with
      DFS   | 
|--------------------------------------------------- | 
|                                                    | 
|                                                    | 
|Updated Mineral Resouce Estimate                    | 
|Measured                                            | 
|Indicated                                           | 
|Measured & Indicated                                | 
|Inferred                                            | 
|DFS                                                 | 
|Measured                                            | 
|Indicated                                           | 
|Measured & Indicated                                | 
|Inferred                                            | 
|Change in M&I from DFS to
      Current             | 
|Infill drilling                                     | 
|Extension to 0' elevation from 500'
      elevation | 
|Total change                                        | 

|1. | Mineral resources have been calculated using the
      following metal prices: Copper - $1.25/lb, Nickel - $5.60 per pound,
      Cobalt - $15.25/lb, Palladium - $210 per ounce, Platinum - $800 per ounce
      and Gold - $400 per ounce.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                             
|2. | The NMV is calculated by summing the product of the grade
      of each metal, the metal price (in the same units) used in resource
      modeling, the expected metal recovery, and the expected payment terms as
      set out in the DFS.

The resource estimate update was completed by a team from the
  Toronto office of Wardrop Engineering working closely with PolyMets chief
  geologist Richard Patelke. A NI 43-101 compliant report describing this increase
  was issued in September 2007 and has been filed on PolyMets website (www.polymetmining.com)
  and on SEDAR at www.sedar.com. Pierre Desautels of Wardrop and Richard
  Patelke of PolyMet are the Qualified Persons for this report.

- 21 -

---

On September 26, 2007 PolyMet reported that proven and probable
  mineable reserves at the NorthMet Project had increased by 51% to 275 million
  short tons from the 182 million short tons reported in the DFS.

These reserves are constrained to mineable blocks associated
with material contained in the measured and indicated resource blocks in the DFS
for which detailed mining cost estimates, infrastructure planning, and waste
rock stockpile locations were prepared as part of a larger study supporting the
DFS. It should be noted that the inferred resources were not included in the DFS
or in this interim reserve update.

In conjunction with this increase in reserves, the strip
(waste:ore) ratio for the revised mine plan declined to 1.46:1 from 1.66:1.

Updated Reserves compared with DFS

|                         |  | Short Tons |  |  | Copper |  |  | Nickel |  |  | Cobalt |  |  | Precious Metals | 
|------------------------ |  | ---------- |  |  | ------ |  |  | ------ |  |  | ------ |  |  | --------------- | 
|                         |  | (millions) |  |  | (%)    |  |  | (%)    |  |  | (%)    |  |  | (oz/st)         | 
|Updated Reserve Estimate |  |            |  |  |        |  |  |        |  |  |        |  |  |                 | 
|Proven                   |  | 118.1      |  |  | 0.30   |  |  | 0.09   |  |  | 0.008  |  |  | 0.011           | 
|Probable                 |  | 156.5      |  |  | 0.27   |  |  | 0.08   |  |  | 0.008  |  |  | 0.010           | 
|Proven and Probable      |  | 274.7      |  |  | 0.28   |  |  | 0.08   |  |  | 0.008  |  |  | 0.010           | 
|Waste                    |  | 401.2      |  |  |        |  |  |        |  |  |        |  |  |                 | 
|Strip Ratio              |  | 1.46       |  |  |        |  |  |        |  |  |        |  |  |                 | 
|                         |  |            |  |  |        |  |  |        |  |  |        |  |  |                 | 
|DFS                      |  |            |  |  |        |  |  |        |  |  |        |  |  |                 | 
|Proven                   |  | 80.4       |  |  | 0.32   |  |  | 0.09   |  |  | 0.008  |  |  | 0.012           | 
|Probable                 |  | 101.3      |  |  | 0.30   |  |  | 0.08   |  |  | 0.007  |  |  | 0.011           | 
|Proven and Probable      |  | 181.7      |  |  | 0.31   |  |  | 0.08   |  |  | 0.008  |  |  | 0.012           | 
|Waste                    |  | 302.3      |  |  |        |  |  |        |  |  |        |  |  |                 | 
|Strip Ratio              |  | 1.66       |  |  |        |  |  |        |  |  |        |  |  |                 | 

| | 1. | The terms Mineral Resources and Reserves as used herein
      conform to the definitions contained in NI 43- 101.                                                                                                                                        
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                          
| | 2. | Mineral Resources and Reserves have been calculated using
      the following metal prices: Copper - $1.25/lb, Nickel - $5.60 per pound,
      Cobalt - $15.25/lb, Palladium - $210 per ounce, Platinum - $800 per ounce
      and Gold - $400 per ounce.

The reserve estimate update was completed by a team from the
Toronto office of Wardrop Engineering working closely with our team of Don
Hunter and Richard Patelke. Gordon Zurowski of Wardrop and Don Hunter of PolyMet
were the Qualified Persons.

|f) | Geology and Mineralization
|-- | --------------------------

The geology of northeastern Minnesota is predominantly
Precambrian in age. Approximately 1.1 billion years ago, mid-continent rifting
resulted in mafic volcanism and associated intrusions along a portion of the
Midcontinent Rift System, which extends from Ohio, through the Lake Superior
region to Kansas. The Midcontinent Rift consists of three parts: thick lava
flows, intrusive rock and overlying sedimentary rock. There are three major
intrusive complexes: the Coldwell Complex of Ontario, the Mellen Complex along
the south shore of Lake Superior and the Duluth Complex along the north
shore.

The Duluth Complex hosts the NorthMet mineralization. The
Complex extends in an arcuate belt from Duluth to the northeastern tip of
Minnesota. Emplacement of the intrusion appears to have been along a system of
northeast-trending normal faults that form half-grabens stepping down to the
southeast. The magma was intruded as sheet-like bodies along the contact between
the Early Proterozoic sedimentary rocks of the Animikie Group and the mafic lava
flows of the North Shore Volcanic Group.

- 22 -

---

The Duluth Complex is represented by the Partridge River
intrusion which overlays the Biwabik Iron Formation  the Partridge River
intrusion is locally sub-divided into seven troctolitic units:

- Unit 7 and Unit 6  texturally homogeneous plagioclase-rich troctolite,
  each with a persistent ultramafic base. Units 6 and 7 are each about 400 ft.
  thick.
- Unit 5  coarse grained anorthositic troctolite (300 ft.) grading down to
  Unit 4.
- Unit 4  homogeneous augite troctolite and troctolite, with a less
  persistent ultramafic horizon. The contact between Unit 4 and Unit 5 is
  difficult to establish and the two units may actually be a single unit.
- Unit 3  the most easily recognized unit because of its mottled appearance
  due to olivine oikocrysts. It is fine grained troctolitic anorthosite to
  anorthositic troctolite. Average thickness is 250 ft. but locally can be up to
  500 ft.
- Unit 2  homogeneous troctolite with abundant ultramafic units and a
  generally persistent basal ultramafic. This unit shows the most variation in
  thickness and may be locally absent. Units 2 & 3 are modeled as a single
  package for resource estimation.
- Unit 1  the most heterogeneous unit, both texturally and compositionally.
  Grain size is generally coarser at the top of the unit and fines downward. The
  unit contains abundant inclusions of the footwall rock and is noritic towards
  the base. This is the main sulfide mineral bearing unit. Two internal
  ultramafic layers are generally present. Unit 1 is probably the result of
  multiple pulses of magma injection. Average thickness is about 450 ft.

The general trend of the sedimentary rocks at the base of the
NorthMet deposit is striking east-northeast and to dipping to the southeast
about 15-25°, and the Partridge River intrusion appears to follow this general
trend.

The majority of the rock at NorthMet is unaltered, with a minor
alteration found along fractures and micro-fractures, consisting of serpentine,
chlorite and magnetite replacing olivine, uralite and biotite replacing
pyroxene, and sausserite and sericite replacing plagioclase. Sulfide
mineralization does not appear to be directly related to the alteration.

The metals of interest at NorthMet are copper, nickel, cobalt,
platinum, palladium, gold and lesser amounts of rhodium and ruthenium. In
general, the metals are positively correlated with copper mineralization, cobalt
being the main exception. Unit 1 mineralization is found throughout the deposit.
A less extensive mineralized zone is found in Units 4, 5, and 6 in the western
part of the deposit, it is copper-rich relative to sulfur, and moderately
enriched in PGMs.

Sulfide mineralization consists of chalcopyrite, cubanite,
pyrrhotite and pentlandite with minor bornite, violarite, pyrite, sphalerite,
galena, talnakhite, mackinawite and valleriite. Sulfide minerals occur mainly as
blebs interstitial with plagioclase, olivine and augite grains, but also occur
within plagioclase and augite grains, as intergrowths with silicates, or as fine
veinlets. The percentage of sulfides varies from trace to about 5%. Palladium,
platinum and gold are associated with the sulfides.

The NorthMet deposit has been identified over a length of
approximately 2.5 miles and has been found to a depth of more than 2,600 feet.
It is covered by a thin layer of glacial till but otherwise reaches to the
surface at the northern edge.

- 23 -

---

|(g) | Development Plans
|--- | -----------------

Our development plans were set out in our Definitive
Feasibility Study prepared by Bateman Engineering Pty. in September 2006. This
contemplated the development of a new open pit mine at our NorthMet ore body,
using rail infrastructure we acquired as part of Cliffs II to transport
approximately 32,000 tons of ore per day from the mine site to our Erie Plant,
where we would use our existing facilities to crush and mill the rock. The
finely ground material would then pass to a new flotation circuit with waste
material sent to existing waste tailings facilities and the concentrate being
passed to a new hydrometallurgical plant that we plan to build at the Erie Plant
site.

We believe that we have completed exploration work required for
the initial phases of production at NorthMet, however, we may need to conduct
further in-fill drilling during the anticipated life of the project. Since
publication of the DFS, we have recognized the commercial potential to sell
concentrates during the construction and commissioning of the new
hydrometallurgical facilities.

DFS Update

On May 20, 2008 we reported revised plans and cost estimates
for construction and operating costs. These revised plans included:

- the sale of concentrate during the construction and commissioning of new
  metallurgical facilities resulting in a shorter pre-production construction
  period (under twelve months) and reduced capital costs prior to first revenues
  ($312 million versus $380 million) despite the inclusion of an estimated $65
  million of additional measures to protect the environment;
- the new metallurgical facilities to be constructed during initial
  production and sales of concentrate. We anticipate that much of the additional
  $290 million of capital costs, including $20 million of additional
  environmental measures, will be largely funded from cash flow from initial
  operations;
- mine plans (based on copper at $1.25 per pound) reflect the increase in
  reserves and decrease in stripping ratio reported on September 26, 2007, the
  use of 240-ton trucks, and owner versus contract mine operations, and
- $77 million of mining equipment, which was assumed to be provided by a
  mining contractor in the DFS has been incorporated as an operating lease in
  updated operating costs.

On February 2, 2011 we reported a further refinement to the
development plan whereby we propose to build the project in two phases:

- Phase I: produce and market concentrates containing copper, nickel, cobalt
  and precious metals, and
- Phase II: process the nickel concentrate through a single autoclave,
  resulting in production and sale of high grade copper concentrate, value added
  nickel-cobalt hydroxide, and precious metals precipitate products.

The changes reflect continued metallurgical process and other
project improvements as well as improved environmental controls that are being
incorporated into the Supplemental Draft EIS. The analysis is based on likely
metal market conditions. The advantages, compared with the earlier plan, include
a better return on capital investment, reduced financial risk, lower energy
consumption, and reduced waste disposal and emissions at site.

Approximately $127 million of the total $602 million in total
capital costs, and of the $290 million capital costs for the larger scale
metallurgical facilities described in the 2008 DFS Update was attributed to the
second autoclave and the copper circuit.

We plan to provide a detailed project update when the project
development plans now being analyzed in the Supplemental Draft EIS are
finalized. This detailed project update will include revised mine plans, process
and project improvements, and will incorporate the latest environmental
controls.

Saleable ProductsThe DFS describes three products from NorthMet. During construction and
  commissioning of the hydrometallurgical plant, we anticipate that we will sell
  separate copper and nickel concentrates. Once the smaller-scale hydrometallurgical
  plant is operational, our long term products will comprise copper concentrate,
  a mixed hydroxide of nickel and cobalt that will be shipped to a third-party
  processor to produce nickel and cobalt metals, and a precious metals precipitate
  that will be shipped to a third-party refiner for production of palladium, platinum
  and gold.

- 24 -

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On September 4, 2008 we announced that we had reached an agreement
  with Glencore whereby Glencore would purchase our production of concentrates,
  metals, or intermediate products at prevailing market terms at the time of delivery
  for at least the first 5 years of production. We executed the agreement on October
  31, 2008 as part of a strategic alliance between us and Glencore.

Capital CostsOur May 2008 DFS Update set out that,
on a like-for-like basis (excluding scope changes), the total capital cost had
increased to $516.8 million. This increase reflects both cost inflation and
design scope changes since the DFS, including facilities needed to ship
concentrate during the construction and commissioning of the new
hydrometallurgical plant. This staged approach shortens the initial construction
period, makes the project less sensitive to the delivery schedule for long lead
time equipment such as autoclave vessels, and means that we can commence
operations of the mine, the existing crushing and milling plant, the existing
tailings disposal facilities, and the new flotation circuit, before starting the
new hydrometallurgical plant.

In addition to these scope changes and the effect of inflation,
we anticipate spending an additional $85.1 million on measures to protect the
environment, over and above the measures contemplated in the DFS. $76.6 million
for mining equipment that was assumed to be provided by a mining contract in the
DFS has been incorporated as an operating lease in updated operating costs.

May 2008 DFS Update Capital Costs(US dollars,
millions)

|                                         |  |              |  |  | Change   |  |  | Initial
      Concentrate | 
|---------------------------------------- |  | ------------ |  |  | -------- |  |  | ------------------------- | 
|                                         |  | Full Project |  |  | from DFS |  |  | Sales                     | 
|                                         |  |              |  |  |          |  |  |                           | 
|Definitive Feasibility Study             |  | 379.8        |  |  |          |  |  | 138.7                     | 
|Escalation and
      other scope changes |  | 137.0        |  |  | 36%      |  |  | 108.9                     | 
|Total                                    |  | 516.8        |  |  |          |  |  | 247.6                     | 
|Environmental
      measures             |  | 85.1         |  |  |          |  |  | 64.7                      | 
|Total change                             |  | 222.1        |  |  | 58%      |  |  | 173.6                     | 
|**TOTAL**                                |  | 601.9        |  |  |          |  |  | 312.3                     | 
|                                         |  |              |  |  |          |  |  |                           | 

In February 2011 we announced that we had simplified the
metallurgical process whereby we plan to build one hydromet circuit to process
nickel concentrate, and continue producing and marketing copper concentrate over
the long term. This revised process eliminates the planned copper
solvent-extraction/electro-winning circuit. These elements represented
approximately $127 million of the total $602 million capital costs, but have no
effect on the capital cost for the concentrates-only phase of the project.

May 2008 DFS Update Operating Plans and CostsThe
overall mining and operating plan remains the same as that defined in the DFS
and which forms the basis of the plan being analyzed in the environmental impact
statement. We intend to mine 32,000 tons of ore per day for an operating life of
twenty years, processing a total of 224 million tons of ore. The mine plan
continues to be based on the following metal prices: copper - $1.25/lb, nickel -
$5.60 per pound, cobalt - $15.25/lb, palladium - $210 per ounce, platinum - $800
per ounce, and gold - $400 per ounce.

Operating costs per ton of ore processed have increased to
$13.33 from $11.02 in the DFS reflecting higher fuel, mine equipment, and other
consumable costs, as well as general inflation. The cost of mining and
delivering ore to the plant is now estimated at $4.31 per ton compared with
$3.80 per ton in the DFS. The increase in mining costs has been partially offset
by the lower strip ratio, larger mining equipment, and owner versus contractor
operation.

- 25 -

---

The economic analysis is based on SEC-reserve standards, namely
the three-year trailing average, which we calculated at April 30, 2008 (the end
of our first fiscal quarter). This price deck is: copper - $2.90/lb, nickel -
$12.20/lb, cobalt - $23.50/lb, palladium - $320/oz, platinum - $1,230/oz, and
gold - $635/oz. While these prices are somewhat higher than those used on the
economic analysis in the DFS, the price are slightly below the three-year
average at the end of our fiscal 2009 year, namely: copper - $3.13/lb, nickel -
$12.45/lb, cobalt - $27.34/lb, palladium - $342/oz, platinum - $1,343/oz, and
gold - $733/oz.

The DFS Update prices translate into copper cash costs of $1.05
per pound using a co-product basis to calculate costs, compared with the DFS
estimate of $0.81 per pound. Taking revenues from the other metals as a
deduction against costs, the co-product basis shows a cost of $(0.28) per pound
compared with $0.06 per pound in the DFS.

We plan to further update the DFS during the course of our
current fiscal year to reflect all project changes that are being incorporated
into the Supplemental Draft EIS.

Economic SummaryKey economic metrics include
earnings before interest, tax, depreciation, and amortization (EBITDA) which is
projected to increase to $217.3 million on average over the first five years of
operations from $175.3 million estimated in the DFS. The net present value of
future cash flow (after tax) discounted at 7.5% is estimated to be $649.4
million compared with $595.4 million in the DFS, and the after tax internal rate
of return is now estimated at 30.6% compared with 26.7% in the DFS. The table
below also sets out the affect on EBITDA of a 10% change in each metal
price.

- 26 -

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May 2008 DFS Update Key Economic Highlights

|(h) | Regulations and Government
Rules
|--- | --------------------------------

The mining industry has been subject to increasing government
controls and regulations in recent years. We have obtained all necessary permits
for exploration work performed to date and anticipate no material problems
obtaining the necessary permits to proceed with further development.

ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND
PROSPECTS

|(a) | Operating Results
|--- | -----------------

This discussion and analysis should be read in conjunction with
our consolidated financial statements. Our functional currency is the United
States dollar and our financial statements are prepared in accordance with
Canadian Generally Accepted Accounting Principles (GAAP), which is in the
process of transitioning to IFRS; however, the only significant difference
between U.S. GAAP and Canadian GAAP with regard to our financial statements
relates to the accounting for fair value of the conversion factor of convertible
debt (see Item 3: Key Information  A. Selected Financial Data for the impact of
this difference). All amounts in this discussion and in the consolidated
financial statements are expressed in United States dollars, unless identified
otherwise.

- 27 -

---

Summary of Events During the Fiscal Year Ended January 31,
2011

During the year ended January 31, 2011, and through the date of
the filing of this Annual Report, we continued to advance our NorthMet Project
including the activities noted below.

In April 2010, Cliffs entered into a consent decree with the
Minnesota Pollution Control Agency (MPCA) relating to alleged violations on
the Cliffs Erie Property. This consent decree required submission of Field Study
Plan Outlines, which have been approved by the MPCA, and Short Term Mitigation
Plans, which have not yet been formally approved. As part of its prior
transactions with Cliffs, we had agreed to indemnify Cliffs for certain on-going
site environmental liabilities.

At the annual shareholders' meeting held on July 7, 2010,
Messrs. Corneliuson and Swearingen did not stand for re-election to our Board of
Directors owing to other personal commitments. The Board thanked them for their
contributions to the Company during their tenure.

On October 31, 2010, 1,100,000 warrants to purchase shares of
PolyMet common stock at $4.00 per share that had been issued to BNP Paribas Loan
Services (BNPP) expired.

On November 12, 2010, we announced that Glencore had agreed to
purchase 15 million shares of our common stock at $2.00 per share in three
tranches over the next two years. In addition, Glencore agreed to extend the
maturity date of the $25 million (initial principal) debentures issued to
Glencore under the 2008 financing to September 30, 2012 and cancelled the final
$25 million debenture financing commitment and the 6.25 million share purchase
warrants issued as part of the 2008 financing. We have issued warrants to
purchase 3 million shares at $2.00 per share at any time until December 31, 2015
as compensation for the additional financing and other changes. On 17 January
2011 we closed the first tranche of this private placement, issuing 5 million of
our common shares to Glencore at US$2.00 per Share for gross proceeds of US$10
million.

On December 16, 2010 the Board of the Iron Range Resources and
Rehabilitation Board (IRRRB) approved, on the commissioners recommendation, a
secured loan to our wholly-owned subsidiary, Poly Met Mining, Inc. of up to $4
million. A legal challenge as to whether the IRRRB was authorized to make such a
loan was withdrawn following passage of state legislation that clarified that
the IRRRB is an economic development agency with no regulatory oversight for
mine permitting activities.

Proceeds from the loan will be used to purchase forest land,
wetlands, and lakes with high natural resource and recreational value that would
become available for public use and enjoyment. These properties, which we
currently have under purchase option, would be purchased for future use as part
of a proposed land exchange for surface rights at the proposed NorthMet mine
site currently controlled by the USFS Superior National Forest.

With effect from December 31, 2010, William Murray stepped down as Executive Chairman and George Molyviatis resigned his board membership.  Mr. Murray continues to serve as one of our directors.  Ian Forrest and Frank Sims, both independent directors, serve as independent co-Chairmen.  Mr. Forrest continues as Chair of the Audit and Compensation Committees and Mr. Sims continues as Chair of the Corporate Governance Committee.

On December 31, 2010, warrants to purchase 3,842,045 shares of
our common stock at $3.00 per share, which had been issued in connection with
the April 2007 financing, expired.

On January 17, 2011 we closed the first tranche of the November
2010 private placement with Glencore, issuing 5 million common shares of the
Company to Glencore at US$2.00 per Share for gross proceeds of US$10
million.

On January 24, 2011 Bradley H. (Brad) Moore was appointed Executive
  Vice-President, Environmental & Governmental Affairs. Mr. Moore has more
  than 25 years experience in environmental regulation and review and is assuming
  overall responsibility for our effort to complete environmental review and obtain
  permits necessary for construction and operation of the NorthMet copper-nickel-precious
  metals project located in the established Mesabi mining district in northeastern
  Minnesota. Mr. Moore served as Commissioner of the Minnesota Pollution Control
  Agency ("MPCA") from 2006 to 2008, and as Assistant Commissioner for Operations
  of the Minnesota Department of Natural Resources (MDNR) from January 1999 to
  August 2006.

- 28 -

---

On February 2, 2011 we announced that we had simplified the proposed
  metallurgical process and now plans to build the project in two phases:

- Phase I: produce and market concentrates containing copper, nickel, cobalt
  and precious metals, and
- Phase II: process the nickel concentrate through a single autoclave,
  resulting in production and sale of high grade copper concentrate, value added
  nickel-cobalt hydroxide, and precious metals precipitate products.

Previous plans included a second autoclave and a copper solvent
extraction/electro-wining (SX-EW) circuit to produce copper metal along with
value added nickel-cobalt hydroxide and precious metals precipitate products.
The changes reflect continued metallurgical process and other project
improvements as well as improved environmental controls that are being
incorporated into the Supplemental Draft EIS. The advantages, compared with the
earlier plan, include a better return on capital investment, reduced financial
risk, lower energy consumption, and reduced waste disposal and emissions at
site. Approximately $127 million of the total $602 million capital costs
estimated in the May 2008 DFS Update will not be incurred in this revised
plan.

On March 10, 2011 we appointed Alan R. (Al) Hodnik and Michael
M. (Mike) Sill to our Board of Directors.

In March 2011, we entered into an agreement with the MDNR
committing to an additional $2,818,000 work on environmental review through April 1,
2012.

On April 15, 2011 we reported that the Company and the Lead
Agencies expect to finalize detailed work plans for the Supplemental Draft EIS
by May, 2011. The detailed project, which includes the simplified metallurgical
process and reduction in capital costs that we announced on February 2, 2011,
will then be modeled to predict environmental impacts of the project. The third
party contractor hired by the lead agencies will then prepare a preliminary
supplemental draft Environmental Impact Statement, which will be reviewed by the
Lead Agencies, cooperating agencies (including the US Environmental Protection
Agency and tribal governments) and ourselves. Once that review process has been
completed, the supplemental draft EIS will be finalized for publication and
public comment. The lead agencies anticipate publishing the Supplemental Draft
EIS during the fall of 2011.

On April 15, 2011 the Board of the IRRRB reapproved a secured loan to Poly Met Mining, Inc. of up to $4 million, which is expected to close on or before 30 June, 2011. The loan will be secured by the land to be acquired from proceeds of the loan, carry a fixed interest rate of 5% per annum, and will be repayable on June 30, 2016. Subject to regulatory approval, we also agreed to issue warrants giving the IRRRB the right to purchase up to 400,000 shares of our common stock at US$2.50 per share at any time until the earlier of June 30, 2016 and one year after we receive permits.

Summary of Operating Results

As of January 31, 2011, we operated in one segment, the
exploration and development of the base and precious metals at our NorthMet
Project in Minnesota, United States. Head office comprises general and
administrative costs, stock based compensation expense, financing expenses,
foreign exchange interest income, assets, purchase of property, plant and
equipment and amortization reported by the Canadian head office.

|                       |   | NorthMet   |  |   | Head Office |  |   | Consolidated | 
|---------------------- | - | ---------- |  | - | ----------- |  | - | ------------ | 
|                       |   | Project    |  |   | (US$000s)  |  |   | (US$000s)   | 
|2011                   |   | (US$000s) |  |   |             |  |   |              | 
|                       |   |            |  |   |             |  |   |              | 
|Segment operating loss | $ | 1,536      |  | $ | 5,747       |  | $ | 7,283        | 

- 29 -

---

|Mineral property, plant and equipment       | $ | 130,192 |  | $ | 39     |  | $ | 130,231 | 
|------------------------------------------- | - | ------- |  | - | ------ |  | - | ------- | 
|Other assets                                | $ | 4,478   |  | $ | 10,323 |  | $ | 14,801  | 
|Identifiable assets                         | $ | 134,670 |  | $ | 10,362 |  | $ | 145,032 | 
|2010                                        |   |         |  |   |        |  |   |         | 
|Segment operating loss                      | $ | 892     |  | $ | 8,131  |  | $ | 9,023   | 
|Mineral property,
      plant and equipment | $ | 115,781 |  | $ | 51     |  | $ | 115,832 | 
|Other assets                                | $ | 2,466   |  | $ | 21,340 |  | $ | 23,806  | 
|Identifiable
      assets                   | $ | 118,257 |  | $ | 21,391 |  | $ | 139,648 | 
|2009                                        |   |         |  |   |        |  |   |         | 
|Segment operating
      loss                | $ | 560     |  | $ | 4,963  |  | $ | 5,523   | 
|Mineral property, plant and equipment       | $ | 91,832  |  | $ | 78     |  | $ | 91,910  | 
|Other assets                                | $ | 2,546   |  | $ | 7,143  |  | $ | 9,689   | 
|Identifiable assets                         | $ | 94,378  |  | $ | 7,221  |  | $ | 101,599 | 

On November 12, 2010, we announced that we had renegotiated our
debenture financing with Glencore. The agreed amendments to the debenture
financing are as follows:

- The maturity date, and therefore accounting for accretion, of the Tranche
  A-D Debentures was extended from September 30, 2011 to September 30, 2012. The
  Debentures were issued in four tranches between October 2008 and September
  2009. The total initial principal of the Debentures is US$25 million with
  US$2.539 million of accrued interest as of December 31, 2011. The Debentures
  continue to be exchangeable into our common shares at US$4.00 per share, as
  agreed to in 2008.
- Cancellation of Glencores commitment to purchase, and our commitment to
  issue, US$25 million of Tranche E Debentures which were to be issued upon
  publication of the Final Environmental Impact Statement, receipt of a term
  sheet for construction financing, and other customary conditions.
- Cancellation of warrants to purchase 6.25 million of our common shares at
  US$3.00 at any time until September 30, 2011 issued to Glencore in connection
  with the Debentures.
- Issuance of warrants to purchase 3 million of our common shares at US$2.00
  at any time until December 31, 2015, issued to Glencore in consideration of
  the amendments listed above.

On November 12, 2010, we announced that we had
entered into a definitive agreement with Glencore to sell in a private placement
15 million common shares at US$2.00 per share for gross proceeds of US$30
million, before deducting estimated offering expenses. Completion of the sale of
these shares and funding are expected to occur in the following three tranches
subject, in each case, to certain closing conditions:

- Tranche 1 of US$10 million closed on January 17, 2011;
- Tranche 2 of US$10 million will close on the earlier of (i) the date of the Company’s funding requirement as set forth in the Company’s three year operating budget to be approved by Glencore (the “Budget”), and (ii) 17 October 2011, and
- Tranche 3 of US$10 million will close on the earlier of (i) the date of the Company’s funding requirement as set forth in the Budget, ii) within ten business days following receipt by us of key permits, in a form reasonably acceptable to Glencore, that will enable the start of construction of the Project, and iii) 15 October 2012.

- 30 -

---

Glencore has a right of first refusal to provide all material financings, subject to regulatory approval, if it owns 10% or more of our issued and outstanding shares and, if it owns more than 5% of our issued and outstanding shares, Glencore has the right to participate in any equity-related financing to maintain its partially diluted ownership interest (19.7% as of 31 January 2011).

In accordance with both Canadian GAAP and US GAAP, the 12 November 2010 transactions, whereby our existing convertible debt at that date with a book value of $26.730 million was deemed to have been extinguished and reissued, all of the costs associated with the transaction have been recorded as a non-cash expense of $3.647 million

Year ended January 31, 2011 compared with the year ended
January 31, 2010

Overall.Our focus for the fiscal year ended January 31,
2011 was to provide the Lead Agencies with input into the Supplemental Draft EIS
and permit work at our NorthMet Project, obtain additional financing and to
continue to develop the NorthMet Project including updating the mineral reserves
and mineral resources estimates and preparing for construction.

Loss for the year. During the year ended January 31,
2011, we incurred a loss of $7.283 million ($0.05 loss per share) compared to a
loss of $9.023 million ($0.06 loss per share) in 2010. The decrease in the net
loss for the period was primarily attributable to:

- A non-cash future income tax recovery related to expiration of stock
  purchase warrants previously issued of $1,390,000 (January 31, 2010  $nil);
- A non-cash reversal of previously recorded stock-based compensation costs
  relating to board and other management changes resulting in a credit of
  $119,000 in the current year (January 31, 2010  expense of $915,000);
- A non-cash charge of $4.920 million for the amendment of stock warrants in
  the prior year period (current year period - $nil), and
- Investor relations and financing expenses of $420,000 due to the filing of
  an F-3 registration statement during the prior year period (current year
  period - $118,000).

These items were partially offset by the non-cash costs
associated with extending the term of our debentures by a year, the fair value
of the amendments to the Glencore warrants, which resulted in a non-cash charge
of $3,647  million to our income statement. A further offset to the decrease in
reported net loss derived from our decision to review alternatives for
construction financing and not to renew our agreement with BNP Paribas Loan
Services, to advise and assist us in all aspects of preparation for construction
finance, which expired on July 31, 2010. As such, the $1.830 million, $1.197
million of which was non-cash related to the fair value of warrants issued,
recorded as a deferred financing cost asset was written off to the consolidated
statement of loss in the current year. In addition, we recorded a loss of
$520,000 in the current year period as a result of our decision to reclassify an
asset as held for sale and write-down its carrying value to fair value less cost
to sell.

Year ended January 31, 2010 compared with the year ended
January 31, 2009

Overall.Our focus for the fiscal year ended January 31,
2010 was to provide the state of Minnesota with input into the environmental
impact statement and permitting work at our NorthMet Project, obtain additional
financing and to continue to develop the Project including updating the mineral
reserves and mineral resources estimates and preparing for construction.

Loss for the year. During the year ended January 31,
2010 we incurred a loss of $9.023 million ($0.06 loss per share) compared to a
loss of $5.523 million ($0.04 loss per share) in 2009. The increase in the net
loss for the period was primarily attributable to:

- A non-cash charge of $4.920 million for the amendment of warrants (prior
  year period - $544,000);
- Stock-based compensation expense of $915,000 (prior year period -
  $487,000) with the increase being predominantly due to the granting of
  additional stock options in the first quarter and the extension of the term of
  all our stock options outstanding at June 24, 2009 by two years which was
  approved by the disinterested shareholders at our Annual and Special of
  shareholders on June 24, 2009;

- 31 -

---

- Interest income of $5,000 (prior year period - $154,000) with the decrease
  being due to lower cash balances and interest rates;
- Investor relations and financing expenses of $420,000 due to the filing of
  an F-3 registration statement during the 2010 third quarter and additional
  financing related activities,
  and
- A foreign exchange loss of $156,000 in the prior year period due to the
  strengthening of the U.S. dollar versus the Canadian dollar, compared to a
  gain of $24,000 in the current year quarter.

This was partially offset by an other-than-temporary impairment
loss of $1,365,000 in the prior year period (current year period - $nil) and a
foreign exchange loss of $156,000 in the prior year period (current year period
- $24,000) due to the strengthening of the U.S. dollar versus the Canadian
dollar.

Effective February 1, 2009, we adopted CICA Section 3064 -
Goodwill and Intangible Assets. As a result of this standard, the CICA withdrew
EIC 27, Revenue and Expenses during the pre-operating period. With the
withdrawal of EIC 27, we are no longer able to defer operating costs and
revenues incurred prior to commercial production at its development project. The
adoption of this standard resulted us retroactively ceasing to capitalize to
mineral property accretion related to asset retirement obligations in our
consolidated financial statements.

We restated our financial statements for the items above and
the impacts on certain line items of the financial statements with significant
changes were as follows:

Line Item
    
    Year Ended31 January 2009As
    
    
    RestatedPreviouslyReportedMineral Property Plant and Equipment
    
    93,067
    
    
    91,910Loss for the period
    
    4,536
    
    
    4,979Deficit
    
    60,825
    
    
    61,982Loss per share
    
    0.03
    
    
    0.04


- 32 -

---

Effective November 1, 2009, we changed our accounting policy
for accounting for amendments to warrants. Prior to this date, if the amendment
related to warrants held by existing equity holders, we would debit the increase
in fair value as a result of an amendment to the warrants to share capital.
Under its new accounting policy, we record the debit to warrant amendment
expense. This change in accounting policy has been applied retroactively, the
impacts on certain line items of the financial statements with significant
changes, after taking into account the above restatement with respect to Section
3064 / EIC 27, were as follows:

Line Item
      
      Year ended31 January2009As
      
      
      RestatedPreviouslyReportedShare Capital
      
      104,768
      
      
      105,312Loss for the period
      
      4,979
      
      
      5,523Deficit
      
      61,982
      
      
      62,526Loss per share
      
      0.04
      
      
      0.04


|(b) | Liquidity And Capital
Resources
|--- | -------------------------------

Financing Activities

On November 12, 2010, we entered into an agreement with
Glencore whereby Glencore agreed to purchase 15 million common shares at $2.00
per share in three tranches to occur no later than certain agreed dates, and
according to our needs based on a budget to be agreed. The first tranche of 5
million shares for gross proceeds of $10 million was funded on schedule on
January 17, 2010. The remaining tranches, both for gross proceeds of $10
million, are scheduled to close on or before October 17, 2011 and the earlier of
ten business days following receipt of key permits and October 15, 2012,
respectively. Transaction costs for the first tranche totaled $106,000.

On November 24, 2009 we closed an equity financing with
Glencore for 3,773,585 common shares at $2.65 per share for gross proceeds of
$10 million. On January 26, 2010, we closed the second tranche of the previously
announced equity financing with Glencore of an additional 5,660,377 common
shares at $2.65 per common share for gross proceeds of $15 million. Transactions
costs for these two financings totaled $499,000.

During the year ended January 31, 2011 we issued 845,000 common
shares (prior year period  775,000) upon exercise of options for proceeds of
$808,000 (prior year period - $477,000) and nil common shares (prior year period
167,954) upon exercise of share warrants for proceeds of $nil (prior year period
-$494,000).

On August 27, 2009, we announced that we had filed a universal
shelf registration on Form F-3 with the U.S. Securities and Exchange Commission
(SEC). This universal shelf registration allows us to have the option to offer
and sell, from time to time in one or more offerings, up to $500 million of our
debt securities, common shares, warrants and units.

On October 31, 2008, we entered into a financing with Glencore
  for an aggregate of US$50 million floating rate secured debentures due on September
  30, 2011 issued by PolyMet US and guaranteed by the Company. The Debentures
  bear interest at 12-month US dollar LIBOR plus 4%. Interest is payable in cash
  or by increasing the principal amount of the Debentures, at Glencores
  option. The Debentures are secured by the assets of PolyMet and PolyMet US,
  including PolyMets 100% shareholding in PolyMet US.

The Debentures are exchangeable into our common shares at Glencores
  option at US$4.00 per share. We can, at our option, prepay the Debentures if
  our shares trade at a 20-day volume weighted average price equal to or exceeding
  US$6.00, at which time, and at Glencores option, Glencore could exchange
  the Debentures for our common shares within 30 days in lieu of payment. Repayment
  between October 1, 2010 and September 30, 2011 would be at 102.5% of the outstanding
  principal.

- 33 -

---

On October 31, 2008, we issued to Glencore warrants (the "Purchase
  Warrants") to purchase 6.25 million our common shares at US$5.00 if exercised
  before the NorthMet Project has produced a total of 20,000 metric tonnes of
  concentrate, or US$6.00 thereafter.

On November 17, 2009, we announced that we had agreed to modify
certain terms of the above transaction. Under the new terms the Purchase
Warrants entitled Glencore to purchase 6.25 million of our common shares at
US$3.00 and expired on September 30, 2011. If the 20-day volume weighted average
price of our shares were 150% of the exercise price or more ($4.50), and the
Final EIS had been published in the Minnesota Department of Natural Resources
EQB Monitor, PolyMet could accelerate the expiration of the Glencore Warrants to
not less than 21 business days after the notice of acceleration. The incremental
$158,000 increase in the fair value of the warrants due to the warrant exchange
was debited to warrant amendment expense and credited to contributed
surplus.

Separately in November 2009, we agreed to modify the terms of
the final $25 million Tranche E of the $50 million Debenture with Glencore such
that Tranche E, if drawn, could be exchanged at US$2.65 per share. The first
four tranches totaling US$25 million (excluding capitalized interest) that have
already been drawn continue to be exchangeable at US$4.00 per share.

On November 12, 2010, we announced that we had agreed
additional modification of certain terms of the above transaction:

- the maturity date of the Debentures was extended from September 30, 2011 to
  September 30, 2012;
- Glencores commitment to purchase, and our commitment to issue, US$25
  million of Tranche E Debentures, which were to be issued upon publication of
  the Final Environmental Impact Statement and other conditions, were cancelled;
- warrants to purchase 6.25 million of our common shares at US$3.00 at any
  time until September 30, 2011 issued to Glencore were cancelled, and
- warrants to purchase 3 million of our common shares at US$2.00 at any time
  until December 31, 2015, issued to Glencore in consideration of the amendments
  listed above (the "New Warrants") were issued.

During the year ended January 31, 2010 we issued 775,000 shares
(prior year period  262,800) upon exercise of options for proceeds of $477,000
and 167,954 shares upon exercise of share warrants for proceeds of $494,000.

During the year ended January 31, 2008 we issued 15 million
units at US$2.75 per unit, with each unit comprising one common share and
one-half of one warrant (for accounting purposes, the value of the units was
bifurcated between the common shares and the warrants). Each whole warrant was
exercisable into a common share at a price of US$4.00 at any time until October
13, 2008 (see amendment below), subject to an early trigger if the 20-day volume
weighted average price of the common shares is US$6.00 or more. On October 10,
2008, we announced that we had received the consent from the holders of more
than two-thirds of the 8,020,000 warrants issued as part of the April 2007
private placement to exchange those warrants into:

- 4,010,000 warrants, each warrant entitling the holder to purchase one of
  our common shares at US$3.00 per share at any time until the sooner of 30
  calendar days after publication of the draft Environmental Impact Statement by
  the State of Minnesota in the states Environmental Quality Board Monitor and
  October 13, 2009, and
- 4,010,000 warrants, each warrant entitling the holder to purchase one of
  our common shares o at US$5.00 if exercised before the NorthMet Project has
  produced a cumulative total of 20,000 metric tonnes of concentrate, or US$6.00
  thereafter and prior to August 31, 2011. We can accelerate the expiration of
  the warrants if our volume-weighted 20-day average share price trades at a 50%
  premium to the exercise price applicable at any time.

- 34 -

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In October 2009, we received the consent from holders of more
than two-thirds of the above warrants to exchange the 4,010,000 warrants due to
expire on October 13, 2009 for 4,010,000 warrants, each warrant entitling the
holder to purchase one share of our common stock at US$3.00 per share at any
time until the sooner of 30 calendar days after publication of the draft
Environmental Impact Statement by the State of Minnesota in the states
Environmental Quality Board Monitor and December 31, 2009. The incremental
$1,005,000 increase in the fair value of the warrants due to the warrant
exchange was debited to warrant amendment expense and credited to contributed
surplus.

In November 2009, we received the consent from holders of more
than two-thirds of the above warrants to exchange the 4,010,000 warrants due to
expire the earlier of 30 calendar days after publication of the draft
Environmental Impact Statement by the State of Minnesota in the states
Environmental Quality Board Monitor and December 31, 2009 for 4,010,000
warrants, each warrant entitling the holder to purchase one share of our common
stock at US$3.00 per share at any time until the sooner of 21 business days
after publication of the final Environmental Impact Statement by the State of
Minnesota in the states Environmental Quality Board Monitor and December 31,
2010. The incremental $3,757,000 increase in the fair value of the warrants due
to the warrant exchange was debited to warrant amendment expense and credited to
contributed surplus.

Warrants to purchase 167,954 shares of our common stock had been exercised prior to 31 January 2010 and, on 31 December 2010 warrants to purchase 3,842,046 shares of our common stock at $3.00 per share expired.  We recorded a future income tax recovery as the expiration of the warrants triggered a capital gain for tax purposes, which was offset by the application of tax losses carried forward resulting in a credit of $1,219,000.

Year Ended January 31, 2011

Cash used in operating activities in the year ended January 31,
2011 was $3.068 million compared to cash used in the prior year of $2.429
million. The variance is primarily due to the cash based operating activity
differences described above, $193,000 of exploration expenses in the current
year (prior year -$nil) and changes in working capital balances.

Cash provided by financing activities for the year ended January 31, 2011 was $8.666 million compared with $34.111 million in the prior year. The activity in the current year was primarily due to net proceeds of $9.894 million from a Glencore equity offering (prior year period $24.501 million), the net funding from issuance of exchangeable secured debentures of $nil (prior year period - $9.944 million), the scheduled repayment of $2,000,000 of debt (prior year period - $1,250,000) This was offset by the net funding from issuance of exchangeable secured debentures of $9,944,000 in the prior year (current year - $nil).  During the current year period, we received $808,000 from the issuance of common shares on exercise of stock options (prior year period - $477,000) and $nil from the issuance of common shares on the exercise of share warrants (prior year period - $494,000).

Cash used in investing activities for the year ended January
31, 2011 was $16.519 million compared with $17.754 million in the preceding
year, with the decrease being primarily the result of lower engineering, project
and environmental / permitting costs in the current year period as we continued
to scale back detailed engineering and design work that is not needed for
permitting.

Total cash for the year ended January 31, 2011 decreased by
$10.921 million for a balance of $10.361 million compared to the year ended
January 31, 2010 when cash increased by $13.928 million to a balance of $21.282
million.

Substantially all cash and equivalents are held in United
States currency.

As at January 31, 2011 we had working capital of $779,000 compared
  with working capital of $16.313 million at 31 January 2010 consisting primarily
  of cash of $10.361 million (January 31, 2010 - $21.282 million), prepaid expenses
  of $636,000 (January 31, 2010 - $512,000), accounts payable and accrued liabilities
  of $2.444 million (January 31, 2010 - $2.953 million), the current portion of
  the notes to Cliffs of $6.750 million (January 31, 2010 - $2.000 million) and
  the current portion of asset retirement obligations of $1.408 million (January
  31, 2010 - $756,000). We expect to pay the remaining balance of $1.775 million
  (January 31, 2010 - $8.529 million) long term notes to Cliffs and the convertible
  debt principal balance of $25 million plus capitalized interest from working
  capital and additional financing. Our cash is primarily held in deposits and
  bearer deposits of a major Canadian bank and does not include any exposure to
  asset-backed commercial paper.

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Our consolidated financial statements have been prepared on the
  basis that the we will continue as a going concern, which assumes that the Company
  will be able to meet its commitments, continue operations, realize its assets
  and discharge its liabilities in the normal course of business for the foreseeable
  future. However, there are conditions that cast significant doubt on the validity
  of that assumption. We have incurred losses since inception and have an accumulated
  deficit of $78,832,000 at January 31, 2011.

We will need to raise sufficient funds to meet our current
obligations as well as fund ongoing development, capital expenditures and
administration expenses, in accordance with our spending plans.

On November 12, 2010, we announced that we had entered into a
definitive agreement with Glencore AG (Glencore) to sell in a private
placement 15 million common shares at US$2.00 per share for gross proceeds of
US$30 million, before deducting estimated offering expenses. Completion of the
sale of these shares and funding are expected to occur in the following three
tranches subject, in each case, to certain closing conditions:

- Tranche 1 of US$10 million closed on January 17, 2011;
- Tranche 2 of US$10 million to close on the earlier of (i) the date of the
  our funding requirement as set forth in our three year operating budget
  approved by Glencore (the Budget), and (ii) October 17, 2011, and
- Tranche 3 of US$10 million to close on the earlier of (i) the date of our
  funding requirement as set forth in the Budget, (ii) the tenth Business Day
  following receipt by us of key permits, in forms reasonably acceptable to
  Glencore, that enable us to begin construction of the Project, and (iii)
  October 15, 2012.

In order to meet all of its obligations for the period to January 31, 2012, including paying off the current portion of our long-term debt, we will have to successfully receive all of the remaining equity tranches, or obtain alternate financing.  We are in the latter stage of discussions with Glencore with respect to the budget and believe that agreement will be reached by June 30, 2011, which will enable us to access the second and third $10 million tranches of the equity funding in a timely manner that will enable us to meet our obligations.  However, this cannot be assured.

We believe that, based upon the underlying value of the NorthMet Project, that it will be able to obtain the necessary financing from Glencore or other sources to meet our requirements on an ongoing basis; however, there can be no assurance that the necessary financing will be obtained. Factors that could affect the availability of financing include the state of international debt and equity markets, investor perceptions and expectations and the global metals markets.

The financial statements do not reflect any adjustments to the carrying values of assets and liabilities, reported expenses, and balance sheet classifications that would be necessary should we be unable to continue as a going concern, and these adjustments could be material.

Should we wish to continue to further advance the NorthMet
Project to commercial production we will require additional funds. As we have no
operating revenues, the only source of liquidity consists primarily of cash from
proceeds of project debt, other debt and equity financing.

Debt

Pursuant to Asset Purchase Agreements, our wholly owned subsidiary
  Poly Met Mining, Inc. signed three notes payable to Cliffs in the amounts of
  $2,400,000, $7,000,000 and $7,000,000, respectively. The first note has been
  fully repaid. The second note is interest bearing at the Wall Street JournalPrime Rate and is being paid in quarterly instalments equal to $250,000
  commencing December 31, 2006, with the balance repayable upon receipt of commercial
  financing, for total repayment of $7,000,000. The third note is interest bearing
  at the Wall Street JournalPrime Rate and is being paid in quarterly
  instalments equal to $250,000 commencing on December 31, 2009 for total repayment
  of $7,000,000 with final payment due on December 31, 2011. No interest was payable
  on the third note until December 31, 2009, which accordingly had been fair valued,
  for balance sheet purposes, by discounting it at 8.25% .

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Pursuant to a financing agreement with Glencore, we have entered
  into convertible debenture agreements for $25 million. The Debentures, originally
  due September 30, 2011, were extended under the same terms to September 30,
  2012, bear interest at 12-month US dollar LIBOR plus 4%. Interest is payable
  in cash or by increasing the principal amount of the Debentures, at Glencore's
  option.

As at January 31, 2011 the outstanding long term debt was as
follows:

|                     |   | January 31, 2011 |   |   | January
      31, 2010 |  
|-------------------- | - | ---------------- | - | - | ---------------------- | -
|                     |   |                  |   |   |                        |  
|Notes payable        | $ | 8,500            |   | $ | 10,499                 |  
|Accrued interest     |   | 25               |   |   | 30                     |  
|Convertible debt     |   | 27,633           |   |   | 25,253                 |  
|Total debt           |   | 36,158           |   |   | 35,782                 |  
|Less current portion |   | (6,750           | ) |   | (2,000                 | )
|                     |   |                  |   |   |                        |  
|Long term debt       | $ | 29,408           |   | $ | 33,782                 |  

We anticipate using working capital, additional financing and
funds from operations once commercial production has commenced to meet the above
payment obligations to Cliffs and Glencore.

|(c) | Research and Development, Patents and Licenses,
      Etc.
|--- | ----------------------------------------------------------

None.

|(d) | Trend Information
|--- | -----------------

None.

|(e) | Off-Balance Sheet
Arrangements
|--- | ------------------------------

None.

|(f) | Tabular Disclosure of Contractual
    Obligations
|--- | -------------------------------------------------

The following table lists as of January 31, 2011 information
with respect to the Companys known contractual obligations:

|                                         |   | Payments due by period | 
|---------------------------------------- | - | ---------------------- | 
|                                         |   | Total                  | 
|Contractual
      Obligations            |   |                        | 
|Accounts payable and accrued liabilities | $ | 2,444,000              | 
|Long-term debt obligations               |   | 38,720,000             | 
|Asset retirement obligation              |   | 26,495,000             | 
|Total                                    | $ | 67,659,000             | 

Long-term debt obligations (including the current portion) are
comprised of long-term and convertible debt balances, are set out in this table
on an undiscounted basis and include anticipated interest. Asset retirement
obligation represents the undiscounted obligation at January 31, 2011.

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|(g) | Critical Accounting Policies
|--- | ----------------------------

Our consolidated financial statements have been prepared in accordance
  with accounting principles generally accepted in Canada that require management
  to make assumptions and estimates that affect the reported amounts of assets
  and liabilities and disclosures of contingent assets and liabilities as at the
  date of the financial statements. Significant estimates used in the preparation
  of these consolidated financial statements include, amongst other things, expected
  economic lives of plant and equipment, anticipated costs of asset retirement
  obligations including the reclamation of mine site, valuation of options and
  share purchase warrants, and the assessment of impairment in value of long lived
  assets.

Mineral Property, Plant and Equipment

Mineral property costs, aside from mineral property acquisition
costs, incurred prior to determination of the DFS are expensed as incurred and
expenditures incurred subsequent to the DFS and mineral property acquisition
costs are deferred/capitalized until the property is placed into production,
sold, allowed to lapse or abandoned. Acquisition costs include cash and fair
market value of common shares. As a result of the DFS on the NorthMet Project,
the NorthMet Project entered the development stage effective October 1, 2006. We
have deferred mineral property development expenditures related to the NorthMet
Project from that date.

Plant and equipment are recorded at cost and depreciated over
the estimated life of the related assets calculated on a unit of production or
straight-line basis, as appropriate. Mineral property, plant and equipment
related to the NorthMet Project will begin to be amortized at the time the
project commences operations.

We perform impairment tests on our mineral property, plant and
equipment when events or changes in circumstances indicate that the carrying
values of assets may not be recoverable. These tests require the comparison of
the undiscounted future cash flows to be derived from these assets with the
carrying value of the assets. If a shortfall exists, the assets are written down
to fair value, determined primarily using discounted cash flow models.

Stock-Based Compensation and Share Purchase Warrants

All stock-based awards made to directors, employees and
non-employees are measured and recognized using a fair value based method. For
directors and employees, the fair value of the options is measured at the date
of the grant. For non-employees, the fair value of the options is measured on
the earlier of the date at which the counterparty performance is complete or the
date the performance commitment is reached or the date at which the equity
instruments are granted if they are fully vested and non-forfeitable. For
directors, employees and non-employees, the fair value of the options is accrued
and charged either to operations or mineral property plant and equipment, with
the offsetting credit to contributed surplus, on a graded method over the
vesting period. If and when the stock options are ultimately exercised, the
applicable amounts of contributed surplus are transferred to share capital.

We issue share purchase warrants in connection with certain
equity transactions. The fair value of the warrants, as determined using the
Black-Scholes option pricing model, is credited to contributed surplus. The
recorded value of share purchase warrants is transferred to share capital upon
exercise.

When we amend the terms of either stock options or share
purchase warrants, the incremental change in the fair value of the options or
warrants due to the amendment is charged to warrant amendment expense and
contributed surplus.

Asset Retirement Obligations

We follows CICA Handbook Section 3110, Asset Retirement Obligationswhich requires the recognition of a legal liability for obligations relating
  to the retirement of property, plant and equipment and obligations arising from
  the acquisition, construction, development, or normal operation of those assets.
  Such asset retirement costs must be recognized at fair value, when a reasonable
  estimate of fair value can be estimated, in the year in which the liability
  is incurred. A corresponding increase to the carrying amount of the related
  asset, where one is identifiable, is recorded and amortized over the life of
  the asset.

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Where a related asset is not easily identifiable with a liability,
  the change in fair value over the course of the year is expensed. The amount
  of the liability is subject to re-measurement at each reporting year-end. The
  estimates are based principally on legal and regulatory requirements. It is
  possible that our estimates of its ultimate reclamation and closure liabilities
  could change as a result of changes in regulations, changes in the extent of
  environmental remediation required, changes in the means of reclamation or changes
  in cost estimates.

Our operations may in the future be affected from time to time
in varying degrees by changes in environmental regulations, including those for
future removal and site restoration costs. Both the likelihood of new
regulations and their overall effect upon us may vary greatly and are not
predictable.

Financial Instruments

Section 3855 of the CICA Handbook requires that all financial
assets, except those classified as held to maturity, and derivative financial
instruments, must be measured at fair value. All financial liabilities must be
measured at fair value when they are classified as held for trading, otherwise,
they are measured at cost. Investments classified as held for sale are reported
at fair market value (or mark to market) based on quoted market prices with
unrealized gains or losses excluded from earnings and reported as other
comprehensive income or loss. All financial assets and liabilities have been
classified as either held-to-maturity, available-for-sale, held for trading or
loans and receivables effective February 1, 2007. Investments subject to
significant influence are reported at cost and not adjusted to fair market
value.

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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND
EMPLOYEES

|A. | Directors and Senior
Management
|-- | -------------------------------

Each Director serves until the next annual general meeting of
shareholders or until his/her successor is duly elected, unless his/her office
is vacated in accordance with our Articles of Incorporation.

Vacancies on the Board of Directors are filled by election from
nominees chosen by the remaining Directors and the persons filling those
vacancies will hold office until the next annual general meeting of
shareholders, at which time they may be re-elected or replaced. (For more
details on the process for nominating directors, see our Nominations Committee
Charter, referenced hereto as Exhibit 11.2. )

The following is a list of the names and ages of our directors
and executive officers:

Name
    Age
    PositionW. Ian L. Forrest
    72
    Director, Co-ChairmanFrank L. Sims
    60
    Director, Co-ChairmanJoseph Scipioni
    57
    Director, President, and Chief
      Executive OfficerDouglas J. Newby
    52
    Chief Financial OfficerBradley H. Moore
    50
    Executive Vice President,
      Environmental & Governmental AffairsNiall Moore
    49
    Corporate Secretary and Group ControllerDavid Dreisinger
    53
    DirectorAlan R. Hodnik
    51
    DirectorWilliam Murray
    62
    DirectorStephen Rowland
    49
    DirectorMichael M. Sill
    49
  Director


W. Ian L. Forresthas served as a member of our board of
directors since October 2003, and as our Co-Chair since January 2011. Mr.
Forrest previously served as Chairman of our board until February 5, 2008. He
also serves on our audit, compensation, and nominating and corporate governance
committees. Having played an important role in our revival in 2003, he was
appointed Chairman in May 2004. Mr. Forrest is a member of the Institute of
Chartered Accountants of Scotland and continues to practice as a public
accountant in Geneva, Switzerland. Mr. Forrest has more than 30 years of
experience with public companies in the resource sector. His experience
encompasses the areas of promotion, financing, exploration, production and
company management. He has also participated in several notable projects
including Gulfstream's North Dome gas discovery, Qatar, Reunion Mining's
Scorpion zinc, Namibia, which was subsequently developed by Anglo American, and
Ocean Diamond Mining, which pioneered the independent diamond dredging industry
off the west coast of southern Africa. He also serves as a director of MGold
Resources Inc., Belmore Resources (Holdings) plc and Georex SA.. Mr. Forrest was
a director of Viatrade plc, which was put into receivership in August 2009. Mr.
Forrest currently resides in Vaud, Switzerland.

Frank L. Simshas served as a member of our board of
directors since February 2008, and as our Co-Chair since January 2011. He also
serves on our audit, compensation, nominating and corporate governance, and
safety, health and environmental committees. Mr. Sims has held a series of
progressively senior positions with Cargill, Incorporated between 1972 and his
retirement in December 2007. Most recently he served as Corporate Vice
President. Minnesota-headquartered Cargill is an international provider of food,
agricultural and risk management products and services. Mr. Sims currently
serves on the board of Piper Jaffray Companies. Mr. Sims has previously served
on the board of Tennant Company, as Vice-Chair of the U.S. Marine Transportation
System National Advisory Council, was a Chairman of the board of the North
American Export Grain Association, and as Chairman of the Federal Reserve Bank
of Minneapolis. Mr. Sims currently resides in Georgia, United States.

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Joseph Scipionihas served as our President and Chief
Executive Officer since February 5, 2008 and as a member of our board of
directors since February 19, 2008. He also serves on our safety, health and
environmental committee. Mr. Scipioni served as our Chief Operating Officer
since March 2007 and as General Manager of our Minnesota operations since July
2006. Prior to June 2006, Mr. Scipioni's career spanned more than 30 years with
United States Steel Corporation where he worked in a number of progressively
senior positions in operations. His last position was Plant Manager at the
Keewatin Taconite plant in Minnesota. Mr. Scipioni is an active advisor to the
University of Minnesota Natural Resources Research Institute based in Duluth,
Minnesota and is an officer of the Northern Minnesota Chapter of the Society of
Mining, Metallurgy and Exploration. In addition, Mr. Scipioni has served in
leadership positions with the Iron Mining Association of Minnesota, Central Iron
Range Initiative, United Way of Northeastern Minnesota and Hibbing Chamber of
Commerce. Mr. Scipioni currently resides in Minnesota, United States.

Douglas J. Newbyhas served as our Chief Financial
Officer since November 2005. Mr. Newby has nearly 30 years of experience in the
evaluation and financing of mining companies and projects around the world.
Before coming to PolyMet, Mr. Newby served variously as a Director, Executive
Vice President, interim Chairman, President and Chief Executive Officer of
Western Goldfields, Inc. (now New Gold, Inc.) a US-based gold mining company.
Mr. Newby has also been President of Proteus Capital Corp., a corporate advisory
firm that specializes in the natural resource industries, since July 2001. Mr.
Newby served as Managing Director of Proteus Consultants Ltd. from January 1991
to July 2001 and Managing Partner of Moyes Newby & Co., Inc. from April 1994
to December 1998, both of which provided corporate advisory services primarily
to the international energy and mining industries. From January 2004 to March
2006, Mr. Newby served as Vice-President of Cadence Resources Corporation, an
oil and gas exploration and development company. Prior to January 1991, Mr.
Newby held senior positions with the investment banking firms of S.G. Warburg
& Co., Inc., Morgan Grenfell & Co., and James Capel & Co. Mr. Newby
currently resides in New York, United States.

Bradley H Moorehas served as our Executive Vice
President, Environmental & Government Affairs since January 24, 2011. Mr.
Moore has nearly 30 years experience in government and regulatory positions. He
served as Commissioner of the Minnesota Pollution Control Agency from 2006 to
2008, and as Assistant Commissioner for Operations of the Minnesota Department
of Natural Resources (MDNR) from January 1999 to August 2006. Prior to that, he
worked in leadership and policy analyst positions with the MDNR and the
Minnesota Department of Public Service (now the Department of Commerce). In
December 2008, Mr. Moore joined Barr Engineering as Senior Advisor, Public and
Governmental Affairs where he advised several companies, including PolyMet, on
environmental strategy. Mr. Moore currently resides in Minnesota, United
States.

Niall Moorehas served as our Corporate Secretary since
December 2006 and as our Group Controller since September 2006. Mr. Moore has
over 25 years of experience with public companies in the resource sector. From
November 2002 to May 2006, he was Director, Corporate Reporting for Placer Dome
Inc. and from May 2006 until December 2006 he worked as a consultant to Barrick
Gold, Inc. following that companys acquisition of Placer. Prior to November
2002, Mr. Moore was an audit partner at Ernst & Young LLP. Mr. Moore has
extensive experience in financial reporting, compliance and valuation work. Mr.
Moore currently resides in British Columbia, Canada.

Dr. David Dreisingerhas served as a member of our board
  of directors since October 2003. Dr. Dreisinger also served on our audit committee
  prior to June 2006. Since 1988, Dr. Dreisinger has been a member of the faculty
  at the University of British Columbia in the Department of Materials Engineering
  and is currently Professor and Chairholder of the Industrial Research and Chair
  in Hydrometallurgy. He has published over 200 papers and has been extensively
  involved as a process consultant in industrial research programs with metallurgical
  companies. Dr. Dreisinger has participated in 14 U.S. patents for work in areas
  such as pressure leaching, ion exchange removal of impurities from process solutions,
  use of thiosulfate as an alternative to cyanide in gold leaching, and leach-electrolysis
  treatment of copper recovery from sulfide ores, and the Sepon Copper Process
  for copper recovery from sulfidic-clayey ores. Dr. Dreisinger serves as a director
  of Search Minerals, Inc. and as Vice President  Metallurgy/Process for
  each of Baja Mining Corp and South American Silver Corp. Dr. Dreisinger currently
  resides in British Columbia, Canada.

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Alan R. Hodnikhas served as a member of our board of
  directors since March 9, 2011. He also serves on our compensation committee
  and our corporate governance and nominating committee. Mr. Hodnik was named
  President of ALLETE, Inc. in May 2009 and CEO of that company in May 2010. Since
  joining ALLETE in 1982, Mr. Hodnik has served as Vice President-Generation Operations,
  Senior Vice President of Minnesota Power Operations, and Chief Operating Officer.
  As Chief Operating Officer, he led transmission, distribution, generation, and
  engineering for all aspects of the Company. Mr. Hodnik was the elected mayor
  of the City of Aurora, MN from 1988 to 1998. He is a member of the board of
  Essentia Health - East Region and of the Area Partnership for Economic Expansion
  (APEX). Mr. Hodnik currently resides in Minnesota, United States.

William Murrayserved as our Executive Chairman from
February 5, 2008 to December 31, 2010 and has served as a member of our board of
directors since March 2003. He previously served as our President and Chief
Executive Officer from March 2003 until February 2008. Mr. Murray is an engineer
in the mining industry with more than 35 years of experience in construction
management and project evaluation in North America and Africa. From April 1993
to 2003, Mr. Murray provided consulting services to the mining industry as a
principal of Optimum Project Services Ltd. Prior to that, Mr. Murray was
employed by Fluor Daniel, a large U.S. Engineering & Construction
contractor, as the Director of New Business from October 1989 to April 1993.
From September 1981 to May 1986, Mr. Murray was a Director of Project Services
at Denison Mines where he was part of the core team than built the $1.2 billion
Quintette Coal project. From September 1970 to August 1981, Mr. Murray held a
number of positions at Anglo American Corp in South Africa, principally in the
Gold Division. Mr. Murray is also a director of South American Silver Corp.,
Aura Minerals, Inc., and Prospero Silver Corp. Mr. Murray currently resides in
British Columbia, Canada.

Stephen Rowlandhas served as a member of our board of
directors since October 30, 2008. He also serves on our audit and compensation
committees. Mr. Rowland has been an executive with Glencore, a privately held
diversified natural resources company, since 1988. Mr. Rowland has held various
positions with responsibility for international trading in metals and minerals
in London, Switzerland, and the United States. Prior to joining Glencore, Mr.
Rowland started his career in 1985 with Cargill, Inc. in Minneapolis. Mr.
Rowland currently resides in Connecticut, United States.

Michael M. Sillhas served as a member of our board of
directors since March 9, 2011. He also serves on our audit committee and our
safety, health and environmental committee Mr. Sill has served as President and
CEO of Road Machinery & Supplies Co. since 1994, having joined the company
in 1988. Road Machinery is a distributor of construction, mining and forestry
equipment. Educated at Dartmouth College and J.L. Kellogg Graduate School of
Management, Mr. Sill started his career as a financial analyst and commercial
lending officer with The Northern Trust Company. He has served on the boards of
the Equipment Distributors Association of MN, Associated General Contractors of
MN, and the Twin Cities Regional Board of US Bank. Mr. Sill currently resides in
Minnesota, United States.

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|B. | Statement of Executive
  Compensation
|-- | -------------------------------------

The following table sets forth the compensation paid to our
Named Executive Officers for the fiscal year ended January 31, 2011:

|                                                       |   |                   |  |   |         |  |   | Pension,    |  |   | Bonus Shares |  |   |              | 
|------------------------------------------------------ | - | ----------------- |  | - | ------- |  | - | ----------- |  | - | ------------ |  | - | ------------ | 
|                                                       |   | Salaries          |  |   |         |  |   | Retirement  |  |   |              |  |   |              | 
|                                                       |   | Commissions       |  |   |         |  |   | and Similar |  |   |              |  |   | Total        | 
|                                                       |   | and
      Bonuses |  |   | Options |  |   | Benefits(1) |  |   |              |  |   | Compensation | 
|                                                       |   |                   |  |   |         |  |   |             |  |   |              |  |   |              | 
|William Murray, Executive Chairman                     | $ | 256,035           |  | $ | nil     |  | $ | nil         |  | $ | nil          |  | $ | 256,035      | 
|Joseph Scipioni, President and Chief Executive Officer | $ | 275,100           |  | $ | nil     |  | $ | 14,700      |  | $ | nil          |  | $ | 289,800      | 
|Douglas Newby Chief Financial Officer                  | $ | 220,200           |  | $ | nil     |  | $ | 6,606       |  | $ | nil          |  | $ | 226,806      | 

(1)Balances represent Company contributions under
401k pension plans.

During the fiscal year ended January 31, 2011, we had three
Named Executive Officers (NEOs) (for the purposes of applicable securities
legislation), namely:

| | (a) | William Murray, Executive Chairman until 31 December
      2010; 
| | --- | -----------------------------------------------------------------
| | (b) | Joseph Scipioni, President and Chief Executive Officer;
      and
| | (c) | Douglas Newby, Chief Financial
Officer                           

During the fiscal year ended January 31, 2011, no compensation
  was paid or is payable by us to the directors of the Company, other than the
  NEOs (the Other Directors), or our subsidiaries, if any, for their
  services in their capacity as directors, including any amounts payable for committee
  participation or special assignments pursuant to any standard or other arrangements;
  or

The Company has no pension plan or other arrangement for non-cash
  compensation to the Other Directors, except as follows:

Name of
      Director
    Consulting FeesDavid Dreisinger
    59,000
      (1)


(1)Consulting Fees paid in connection with the
Companys NorthMet Project.

|C. | Board Practices
|-- | ---------------

All of our directors hold office until the next annual meeting
of shareholders and until their successors have been elected and qualified. Our
officers are elected by the Board of Directors at the first Board of Directors
meeting after each annual meeting of shareholders and hold office until death,
resignation, or upon removal from office.

None of our directors have service contracts with us providing
for benefits upon termination of their employment.

Our Audit Committee consists of W. Ian L. Forrest (Chair), Stephen
  Rowland, Michael M. Sill, and Frank L. Sims, all of whom are independent directors.
  All four members of the Audit Committee meet the criteria of an Audit
  Committee Financial Expert under the applicable rules and regulations
  of the SEC and such designation has been ratified by the Board of Directors.
  The Audit Committee oversees our auditing procedures, receives and accepts the
  reports of our independent certified public accountants, oversees our internal
  systems of accounting and management controls, and makes recommendations to
  the Board of Directors as to the selection and appointment of our auditors.
  The Audit Committee is governed by the terms of the Charter of the Audit Committee
  of the Board of Directors which has previously been filed as Exhibit 16.1.

- 43 -

---

Our Compensation Committee consists of W. Ian L. Forrest (Chair),
  Alan R. Hodnik, Stephen Rowland, and Frank L. Sims. The function of the Compensation
  Committee is to administer the 2007 PolyMet Omnibus Share Compensation Plan
  and to have authority over the salaries, bonuses, and other compensation arrangements
  of our executive officers.

Our Nominating and Corporate Governance Committee consists of
Frank L. Sims (Chair), W. Ian L. Forrest, and Alan R. Hodnik. The committee (1)
identifies individuals qualified to become members of the Board, (2) selects, or
recommends to the Board, the director nominees for the next annual shareholders
meeting, (3) selects candidates to fill any vacancies on the Board, and (4)
develops and recommends to the Board a set of corporate governance principles
applicable to the corporation.

|D. | Employees
|-- | ---------

As of January 31, 2011 we had 21 full-time employees, with 3
located in our Vancouver office and 18 located in our Hoyt Lakes office.
None of our employees are covered by a collective bargaining agreement. We
believe that our relations with our employees are good.

During the fiscal year ended January 31, 2011, we employed an
average of 6 consultants working out of our Vancouver and Minnesota offices.

|E. | Share Ownership
|-- | ---------------

For the shareholdings of our directors and executive officers
see Item 7(A).

- 44 -

---

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS

|A. | Major Shareholders
|-- | ------------------

The following table sets forth, as of May 4, 2011, certain
information regarding the ownership of our voting securities by each shareholder
known to our management to be (i) the beneficial owner of more than 5% of our
outstanding common shares, (ii) our directors, (iii) our current executive
officers identified under Item 6(A), and (iv) all executive officers and
directors as a group. We believe that, except as otherwise indicated, the
beneficial owners of the common shares listed below, based on information
furnished by such owners, have sole investment and voting power with respect to
such shares.

Percent ofName and Address of
    Amount and Nature of
    OutstandingBeneficial
      Owner(1)
    Beneficial Ownership
    Common SharesW. Ian L. Forrest (2)
    2,453,000
    1.6%Frank Sims (3)
    939,100
    *Joseph Scipioni (4)
    1,100,000
    *Douglas J. Newby (5)
    1,015,000
    *Bradley H. Moore (6)
    300,000Niall Moore (7)
    525,000
    *David Dreisinger (8)
    1,426,300
    *Alan R. Hodnik (9)
    250,000
    *William Murray (10)
    3,157,276
    2.0%Stephen Rowland
    Nil
    *Michael M. Sill (11)
    250,000
    *All executive officers and directors as a group (11
      persons) (12)
    11,415,676
    7.1%5% or more shareholders:Glencore (13) Baarermattstrasse 3 CH-6341 Baar
      Switzerland
    14,433,962
    9.3%Cleveland-Cliffs, Inc. (14) 1100
      Superior Avenue Cleveland, OH 44114-2589
    9,200,547
    5.9%George Molyviatis (15) Sunion, Greece
    8,634,920
    5.6%


|*  | Less than 1%.                                                                                                                                                 
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                               
|1. | The address of each person, unless otherwise noted, is
      c/o PolyMet Mining Corp., Suite 390-3600 Lysander Lane, Richmond, British
      Columbia V7B 1C3.

- 45 -

---

|2. | Includes 350,000 common shares issuable upon exercise of
      currently exercisable options, at an exercise price of CDN$0.66 per share
      set to expire on July 5, 2011, 150,000 common shares issuable upon
      exercise of currently exercisable options, at an exercise price of
      CDN$1.36 per share set to expire on September 19, 2012, 250,000 common
      shares issuable upon exercise of currently exercisable options, at an
      exercise price of CDN$2.76 per share set to expire on March 20, 2013 and
      150,000 common shares issuable upon exercise of currently exercisable
      options, at an exercise price of US$0.82 per share set to expire on
      February 17, 2016. Mr. Forrest has voting and dispositive control with
      respect to 1,178,000 common shares owned in the name of Micor Trading SA
      of which he is a director, 375,000 common shares owned in the name of
      Panares Resources Inc. of which he is a director, and Catherine L.
      Forrest, Mr. Forrests wife, directly owns 932,380 common
shares.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|3. | Includes 400,000 common shares issuable upon exercise of
      currently un-exercisable options, at an exercise price of US$2.72 per
      share set to expire on February 15, 2015, 200,000 common shares issuable
      upon exercise of currently exercisable options, at an exercise price of
      US$0.82 per share set to expire on February 17, 2016 and 250,000 common
      shares issuable upon exercise of currently un-exercisable options, at an
      exercise price of US$2.04 per share set to expire on March 10, 2018 . Mr.
      Sims directly owns 89,100 common shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4. | Includes 200,000 common shares issuable upon exercise of
      currently exercisable options, at an exercise price of CDN$2.97 per share
      set to expire on June 19, 2013, 300,000 common shares issuable upon
      exercise of currently non-exercisable options, at an exercise price of
      CDN$3.30 per share set to expire on January 5, 2014, 250,000 common shares
      issuable upon exercise of currently non-exercisable options, at an
      exercise price of USD$2.92 per share set to expire on March 12, 2014 and
      100,000 common shares issuable upon exercise of currently non-exercisable
      options, at an exercise price of USD$2.72 per share set to expire on
      February 15, 2015, 200,000 common shares issuable upon exercise of
      currently exercisable options, at an exercise price of US$0.82 per share
      set to expire on February 17, 2016 held in Mr. Scipionis name. Mr.
      Scipioni directly owns 50,000 common shares.                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|5. | Includes 165,000 common shares held in the name of
      Proteus Capital Corp. of which he is the President and controlling
      shareholder, 100,000 common shares issuable upon exercise of currently
      exercisable options, at an exercise price of CDN$1.15 per share set to
      expire on December 5, 2012, 500,000 common shares issuable upon exercise
      of currently exercisable options, at an exercise price of CDN$2.76 per
      share set to expire on March 20, 2013 held in Mr. Newbys name; and 40,000
      common shares issuable upon exercise of currently exercisable options, at
      an exercise price of CDN$0.94 per share set to expire on June 15, 2012,
      and 210,000 common shares issuable upon exercise of currently exercisable
      options, at an exercise price of CDN$1.36 per share set to expire on
      September 19, 2012 held in the name of Proteus Capital Corp. of which he
      is the President and controlling shareholder.                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|6. | Includes 300,000 common shares issuable upon exercise of
      currently un-exercisable options, at an exercise price of USD $2.17 per
      share set to expire on January 25, 2018.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|7. | Includes 275,000 common shares issuable upon exercise of
      currently exercisable options, at an exercise price of CDN$3.82 per share
      set to expire on September 1, 2013, 175,000 common shares issuable upon
      exercise of currently non-exercisable options, at an exercise price of
      CDN$3.30 per share set to expire on January 5, 2014 and 75,000 common
      shares issuable upon exercise of currently exercisable options, at an
      exercise price of US$0.82 per share set to expire on January 30, 2016 held
      in Mr. Moores name.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|8. | Includes 300,000 common shares issuable upon exercise of
      currently exercisable options, at an exercise price of CDN$0.66 per share
      set to expire on July 5, 2011, 150,000 common shares issuable upon
      exercise of currently exercisable options, at an exercise price of
      CDN$1.36 per share set to expire on September 19, 2012, 250,000 common
      shares issuable upon exercise of currently exercisable options, at an
      exercise price of CDN$2.76 per share set to expire on March 20, 2013 and
      150,000 common shares issuable upon exercise of currently exercisable
      options, at an exercise price of US$0.82 per share set to expire on
      February 17, 2016. Dr. Dreisinger directly owns 576,300 common
    shares.                                                                                                                                                                                                                                                                                                        

- 46 -

---

|9.  | Includes 250,000 common shares issuable upon exercise of
      currently un-exercisable options, at an exercise price of USD $2.04 per
      share set to expire on March 10, 2018.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10. | Includes 100,000 common shares issuable upon exercise of
      currently exercisable options, at an exercise price of CDN$0.66 per share
      set to expire on July 5, 2011, 300,000 common shares issuable upon
      exercise of currently exercisable options, at an exercise price of
      CDN$1.36 per share set to expire on September 19, 2012, 450,000 common
      shares issuable upon exercise of currently exercisable options at an
      exercise price of CDN$2.76 per share set to expire on March 20, 2013 and
      200,000 common shares issuable upon exercise of currently exercisable
      options, at an exercise price of US$0.82 per share set to expire on
      February 17, 2016. Mr. Murray directly owns 1,120,100 common shares and
      has voting and dispositive control over 987,176 common shares owned in the
      name of Group 4 Ventures of which he is the sole shareholder.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|11. | Includes 250,000 common shares issuable upon exercise of
      currently un-exercisable options, at an exercise price of USD $2.04 per
      share set to expire on March 10, 2018.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|12. | Includes 6,125,000 common shares issuable upon exercise
      of currently exercisable options and also includes 750,000 common shares
      of currently un-exercisable options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|13. | This shareholder acquired 9,433,962 of our common shares
      from us during our fiscal 2010 fourth quarter and an additional 5 million
      of our common shares from us during our fiscal 2011 fourth quarter. This
      shareholder also holds convertible debentures convertible into 6,887,783
      of our common shares and warrants to acquire 3 million of our common
      shares at $2.00 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|14. | This shareholder held 1,000,000 shares as of January 31,
      2005, 7,200,547 as of January 31, 2006 and 9,200,547 as of January 31,
      2007, January 31, 2008 and January 31, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|15. | This shareholder held 8,334,920 as of January 31, 2010
      and exercised 300,000 options in January 2011.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

Our shareholders who beneficially own more than 5% of our
common shares outstanding do not have voting rights different from any other
shareholders of common shares.

As of May 4, 2011, there were 325 holders of record of our
common shares of which 249 were U.S. residents owning 27.3% of our outstanding
common shares.

- 47 -

---

|B. | Related Party Transactions
|-- | --------------------------

We have conducted transactions with officers, directors and
persons or companies related to directors and paid or accrued amounts as
follows:

| |                                                                           |   | 2011               |  |   | 2010               |  |   | 2009               | 
| | ------------------------------------------------------------------------- | - | ------------------ |  | - | ------------------ |  | - | ------------------ | 
| |                                                                           |   | (in
      $'000's) |  |   | (in
      $'000's) |  |   | (in
      $'000's) | 
| |                                                                           |   |                    |  |   |                    |  |   |                    | 
| | Consulting fees paid to David Dreisinger, a
      Director of the Company | $ | 59                 |  | $ | 59                 |  | $ | 56                 | 
| |                                                                           | $ | 59                 |  | $ | 59                 |  | $ | 56                 | 

The amounts charged to us for the services provided have been
determined by negotiation among the parties. These transactions were in the
normal course of operations and were measured at the exchange value, which is
the amount of consideration established and agreed to by the related party.

During the year ended January 31, 2011, we paid $59,000 (2010 -
$59,000 and 2009 - $56,000) to Dr. Dreisinger for consulting fees primarily in
connection with activities related to the processing / technical side of the
NorthMet Project and related expenses (the latter were supported by invoices and
receipts). The consulting fees were based on a monthly fee of Canadian $5,500
plus general sales tax. Throughout the term of his engagement, Dr. Dreisinger
has conducted in-person and telephonic meetings with Mr. William Murray, the
Companys then Executive Chairman and formerly its President and Chief Executive
Officer, and other members of management at which he provided both verbal and
written updates on the status of test work and made recommendations for future
activities. These meetings occurred approximately every two to three weeks for
the past six years.

The agreement with Dr. Dreisinger was entered into at a time
when our current business plans were being formulated and were month to month
and oral in nature. The agreement was approved by Mr. William Murray. It was
discussed with our board of directors who did not consider that formal approval
and a written contract was necessary at that time. We believe that the contract
was at terms at least as good as could be obtained from third parties.

|C. | Interests of experts and
counsel.
|-- | ---------------------------------

Not applicable.

ITEM 8. FINANCIAL INFORMATION

|A. | Consolidated Statements and Other Financial
      Information
|-- | -------------------------------------------------------------

See Item 18.

Legal Proceedings

Neither we, nor our subsidiaries, is a party to, nor is our
property or the property of our subsidiaries the subject of, any pending legal
or arbitration proceeding that is material.

Dividend Policy

Since its incorporation, we have not declared or paid, and have
no present intention to declare or to pay in the foreseeable future, any cash
dividends with respect to our common shares. Earnings will be retained to
finance further growth and development of our business. However, if our board of
directors declares dividends, all common shares will participate equally, and,
in the event of liquidation, in our net assets.

- 48 -

---

|B. | Significant Changes
|-- | -------------------

On February 2, 2011 we announced that we had simplified the proposed
  metallurgical process and now plan to build the project in two phases:

- Phase I: produce and market concentrates containing copper, nickel, cobalt
  and precious metals, and
- Phase II: process the nickel concentrate through a single autoclave,
  resulting in production and sale of high grade copper concentrate, value added
  nickel-cobalt hydroxide, and precious metals precipitate products.

Previous plans included a second autoclave and a copper solvent
extraction/electro-wining (SX-EW) circuit to produce copper metal along with
value added nickel-cobalt hydroxide and precious metals precipitate products.
The changes reflect continued metallurgical process and other project
improvements as well as improved environmental controls that are being
incorporated into the Supplemental Draft EIS. The advantages, compared with the
earlier plan, include a better return on capital investment, reduced financial
risk, lower energy consumption, and reduced waste disposal and emissions at
site. Approximately $127 million of the total $602 million capital costs
estimated in the May 2008 DFS Update will not be incurred in this revised
plan.

On March 10, 2011 we appointed Alan R. (Al) Hodnik and Michael
M. (Mike) Sill to our Board of Directors.

In March 2011, we entered into an agreement with the State of
Minnesota's Departmen of Natural Resources committing us to an additional $2.8
million of environmental and permitting review work through April1, 2012.

On April 15, 2011 we reported that we and the Lead Agencies
expect to finalize detailed work plans for the Supplemental Draft EIS by early
May 2011. The detailed project, which includes the simplified metallurgical
process and reduction in capital costs that we announced on February 2, 2011,
will then be modeled to predict environmental impacts of the project. The third
party contractor hired by the lead agencies will then prepare a preliminary
supplemental draft Environmental Impact Statement, which will be reviewed by the
lead agencies, cooperating agencies (including the US Environmental Protection
Agency and tribal governments) and us. Once that review process has been
completed, the supplemental draft EIS will be finalized for publication and
public comment. The lead agencies anticipate that the public comment period will
commence during the fall of 2011.  A final EIS will incorporate comments, after
which a subsequent Adequacy Decision by the DNR and Record of Decision by the
federal agencies are necessary before the land exchange can occur and various
permits required to construct and operate the project can be issued.

On April 15, 2011 the Board of the IRRRB reapproved a secured loan to our wholly owned subsidiary Poly Met Mining, Inc. of up to $4 million. The loan will be secured by the land to be acquired from proceeds of the loan, carry a fixed interest rate of 5% per annum, and will be repayable on June 30, 2016. Subject to regulatory approval, we also agreed to issue warrants giving the IRRRB the right to purchase up to 400,000 shares of our common stock at US$2.50 per share at any time until the earlier of June 30, 2016 and one year after we receive permits.  The loan is expected to close on or before 30 June, 2011.

- 49 -

---

ITEM 9. THE OFFER AND LISTING

|A. | The Offer and Listing
Details
|-- | -----------------------------

The following table outlines the annual high and low market
prices for the five most recent fiscal years:



The following table outlines the high and low market prices for
each fiscal financial quarter for the two most recent fiscal periods:



The following table outlines the high and low market prices for
each of the most recent six months:



|1. | On January 31, 2007 we ceased trading on the TSX Venture
      Exchange and on February 1, 2007, we commenced trading on the Toronto
      Stock Exchange.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                           
|2. | On June 26, 2006, we began trading on the NYSE
    Amex.                                                                                                  

|B. | Plan of Distribution
|-- | --------------------

Not applicable.

- 50 -

---

|C. | Markets
|-- | -------

In April 1984, our common shares commenced trading on the TSX
  Venture Exchange in British Columbia, Canada under the symbol "POM. On
  February 1, 2007, our common shares graduated to trading on the TSX Exchange
  in British Columbia under the symbol POM. In August 2000, our common
  shares began trading on the OTCBB under the symbol POMGF. On June
  26, 2006, our common shares commenced trading on the NYSE Amex (formerly the
  American Stock Exchange) under the symbol PLM.

|D. | Selling Shareholders
|-- | --------------------

Not applicable.

|E. | Dilution
|-- | --------

Not applicable.

|F. | Expenses of the Issue
|-- | ---------------------

Not applicable.

ITEM 10. ADDITIONAL INFORMATION

|A. | Share Capital
|-- | -------------

Not Applicable.

|B. | Memorandum and Articles of
  Association
|-- | ----------------------------------------

Incorporation

We were incorporated under the name Fleck Resources Ltd.
pursuant to the Companies Act(British Columbia) and continued under the
Business Corporations Act(British Columbia) by registration of its
memorandum in British Columbia, Canada, under Certificate of Incorporation
#BC0228310 on March 4, 1981. We changed our name to PolyMet Mining Corp. on June
10, 1998. We do not have any stated objects or purposes as such that are not
required by the corporate laws of the Province of British Columbia. Rather, we
are, by such corporate laws, entitled to carry on any activities whatsoever that
are not specifically precluded by other statutory provisions of the Province of
British Columbia.

Powers and Functions of the Directors

The powers and functions of the directors are set forth in our
Articles, the current version of which were adopted on October 6, 2004, and in
the Business Corporations Act (British Columbia). They provide that:

|(a) | a director who holds office or possesses any property,
      right, or interest that could result, directly or indirectly, in the
      creation of a duty of interest that materially conflicts with his duty or
      interest as a director must disclose the nature and extent of the conflict
      and abstain from voting on the approval of the proposed contract or
      transaction, unless all the directors have a disclosable interest, in
      which case the director may vote on such resolution, and moreover, may be
      liable to account to us for any profit that accrued under such an interest
      contract or transaction;
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(b) | a director is not deemed to be interested in a proposed
      contract or transaction merely because it relates to the remuneration of a
      director in that capacity. The directors may, in the absence of an
      independent quorum, vote compensation to themselves;                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(c) | there are no specific limitations on the exercise by the
      directors of our borrowing powers;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(d) | there are no provisions for the retirement or
      non-retirement of directors under an age limit,
and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

- 51 -

---

|(e) | there is no requirement for a director to hold any shares
      in us.
|--- | ----------------------------------------------------------------------

Rights and Restrictions Attached to the Shares

As all of our authorized and issued shares are of one class of
common shares, there are no special rights or restrictions of any nature or kind
attached to any of the shares, including any dividend rights. All authorized and
issued shares rank equally in respect to the declaration and receipt of
dividends and rights to share in any profits or surplus upon our liquidation,
dissolution or winding-up. Each share has attached to it one non-cumulative
vote. Shareholders are not liable to further capital calls made by us. There is
no specific sinking fund provision or any provision discriminating against any
existing or prospective holder of shares as a result of such shareholder owning
a substantial number of shares.

Alteration of Share Rights

The rights of holders of our issued common shares may be
altered by special resolution, which requires the approval of the holders of
two-thirds or more of the votes cast at a meeting of our shareholders called and
held in accordance with applicable law.

Annual General Meetings

Annual General Meetings are called and scheduled upon decision
by the Board of Directors. Pursuant to the Business Corporations Act(British Columbia), we are required to hold an annual meeting in each year,
not more than 15 months after the date of the most recent annual meeting. The
directors may call a meeting of the shareholders whenever they see fit. All
meetings of the shareholders may be attended by registered shareholders or
persons who hold powers of attorney or proxies given to them by registered
shareholders.

Foreign Ownership Limitations

Our Articles and charter documents do not contain limitations
prohibiting non-residents, foreigners or any other group from holding or voting
shares.

Change of Control

There are no provisions in our Articles or charter documents
that currently have the effect of delaying, deferring or preventing a change in
the control in us, or that would operate with respect to any proposed merger,
acquisition or corporate restructuring involving us or any of our subsidiaries.

Share Ownership Reporting Obligations

There are no provisions in our Articles requiring share
ownership to be disclosed.

Securities legislation in Canada requires that shareholder
ownership must be disclosed once a person owns beneficially or has control or
direction over greater than 10% of the issued shares of a corporation, such as
us. This threshold is higher than the 5% threshold under U.S. securities
legislation at which shareholders must report their share ownership.

- 52 -

---

|C. | Material Contracts
|-- | ------------------

Asset Purchase Agreements

For a complete description of the acquisition of the mine site
lease, see Item 4(D)(c)(i).

For a complete description of the acquisition of the Erie Plant
and associated infrastructure acquired in the Asset Purchase Agreements I and
II, see Item 4(D)(c)(ii).

Purchase Agreement

For a complete description of the purchase agreement entered
into with Glencore AG, see Item 5(a).

|D. | Exchange Controls
|-- | -----------------

There are no governmental laws, decrees or regulations in
Canada relating to restrictions on the export or import of capital, or affecting
remittance of interest, dividends or other payments to non-resident holders of
our common shares. Any remittances of dividends to United States residents are,
however, subject to a 15% withholding tax (5% if the shareholder is a company
owning at least 10% of the outstanding common shares) pursuant to the reciprocal
tax treaty between Canada and the United States. See the section of this Form
20-F entitled Taxation.

Except as provided in the Investment Canada Act (the ICA),
which has provisions which govern the acquisition of a control block of voting
shares by a person who is not a Canadian resident (a non-Canadian) of a
company carrying on a Canadian business, there are no limitations specific to
the rights of non-Canadians to hold or vote the common shares under the laws of
Canada or the Province of British Columbia or in our charter documents.

|E. | Taxation
|-- | --------

The following summary of the material Canadian federal income
tax considerations generally applicable to our common shares reflects our
opinion. The tax consequences to any particular holder of common shares will
vary according to the status of that holder as an individual, trust,
corporation, or member of a partnership, the jurisdiction in which that holder
is subject to taxation, the place where that holder is resident and, generally,
according to that holders particular circumstances. This summary is applicable
only to holders who are residents of the United States, have never been a
resident of Canada, deal at arms length with us, hold their common shares as
capital property, and who will not use or hold the common shares in carrying on
business in Canada. Special rules, which are not discussed in this summary, may
apply to a United States holder that is an issuer that carries on business in
Canada and elsewhere.

This summary is based upon the provisions of the Income Tax Act
of Canada and the regulations thereunder (collectively, the Tax Act, or ITA)
and the Canada-United States Tax Convention as amended by the Protocols thereto
(the Tax Convention) as of the date of the Annual Report and the current
administrative practices of Revenue Canada, Customs, Excise and Taxation. This
summary does not take into account Canadian provincial income tax
consequences.

This summary is not exhaustive of all possible income tax
consequences. It is not intended as legal or tax advice to any particular holder
of common stock and should not be so construed. Each holder should consult his
own tax advisor with respect to the income tax consequences applicable to him in
his own particular circumstances.

North American Free Trade Agreement (Canada). The Investment
  Act was amended with the North American Free Trade Agreement (NAFTA) to provide
  for special review thresholds for Americans (including American-controlled
  entities as defined in the Investment Act). Under the Investment
  Act, as amended, an investment in our common shares by an American would be
  reviewable only if it was an investment to acquire control of us and the value
  of our assets was equal to or greater than a specified amount (the Review
  Threshold), which increases in stages. The Review Threshold is currently
  $150 million.

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Disposition of Common Shares. If a non-resident of Canada
  were to dispose of our common shares to a Canadian corporation which deals or
  is deemed to deal on a non-arms length basis with the non-resident and
  that, and immediately after the disposition is connected with us (i.e. holds
  shares representing more than 10% of the voting power and more than 10% of the
  market value of all of our shares issued and outstanding), the amount by which
  the fair market value of any consideration (other than any shares of the purchaser
  corporation) exceeds the paid-up capital of the common shares sold will be deemed
  to be taxable as a dividend paid by the purchasing corporation, either immediately
  or eventually by means of a deduction in computing the paid-up capital of the
  purchasing corporation, and subject to withholding taxes as described below.

Under the Tax Act, a gain from the sale of common shares by a
non-resident will not be subject to Canadian tax, provided the shareholder
(and/or persons who do not deal at arms length with the shareholder) has not
held a substantial interest in us (25% or more of the shares of any class of
our stock) at any time in the five years preceding the disposition. Generally,
the Tax Convention will exempt from Canadian taxation any capital gain realized
by a resident of the United States, provided that the value of the common shares
is not derived principally from real property situated in Canada.

Dividend. In the case of any dividends paid to
non-residents, we withhold the Canadian tax and remit only the net amount to the
shareholder. By virtue of Article X of the Tax Convention, the rate of tax on
dividends paid to residents of the United States is generally limited to 15% of
the gross dividend (or 5% in the case of certain corporate shareholders owning
at least 10% of our voting shares upon ratification of the Protocol amending the
treaty. In the absence of the Tax Convention provisions, the rate of Canadian
withholding tax imposed on non-residents is 25% of the gross dividend. Stock
dividends received by nonresidents from us are taxable by Canada as ordinary
dividends and therefore the withholding tax rates will be applicable.

Where a holder disposes of common shares to us (unless we
acquired the common shares in the open market in the manner in which shares
would normally be purchased by any member of the public), this will result in a
deemed dividend to the U.S. holder equal to the amount by which the
consideration we paid by exceeds the paid-up capital of such stock. The amount
of such dividend will be subject to withholding tax as described above.

Capital Gains. A non-resident of Canada is not subject
to tax under the ITA in respect of a capital gain realized upon the disposition
of a share of a class that is listed on a prescribed stock exchange unless the
share represents taxable Canadian property to the holder thereof. Our common
shares will be taxable Canadian property to a non-resident holder if, at any
time during the period of five years immediately preceding the disposition, the
non-resident holder, persons with whom the non-resident holder did not deal at
arms length, or the non-resident holder and persons with whom he/she did not
deal at arms length owned 25% or more of our issued shares of any class or
series. In the case of a non-resident holder to whom our shares represent
taxable Canadian property and who is resident of the United States, no Canadian
tax will be payable on a capital gain realized on such shares by reason of the
Tax Convention unless the value of such shares is derived principally from real
property situated in Canada or the nonresident holder previously held the shares
while resident in Canada. We believe that the value of our common shares is not
derived from real property situated inside Canada.

Certain United States Federal Income Tax Consequences.
  The following discussion is a summary of certain U.S. federal income tax consequences
  that may be relevant with respect to the ownership and disposition of our common
  shares by a U.S. Holder (as hereinafter defined). This discussion is based upon
  the provisions of the U.S. Internal Revenue Code of 1986, as amended (the Code),
  Treasury regulations promulgated thereunder, administrative rulings and judicial
  decisions, in each case as of the date hereof. These authorities are subject
  to differing interpretations and may be changed, perhaps retroactively, resulting
  in U.S. federal income tax consequences different from those discussed below.
  We have not sought any ruling from the U.S. Internal Revenue Service (IRS)
  with respect to the statements made and the conclusions reached in this discussion,
  and there can be no assurance that the IRS will agree with such statements and
  conclusions.

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This discussion applies only to U.S. Holders who hold our common
  shares as capital assets within the meaning of Section 1221 of the Code. In
  addition, this summary does not address all U.S. federal income tax considerations
  that may be applicable to a U.S. Holders particular circumstances or to
  U.S. Holders who may be subject to special tax rules, including, without limitation:
  tax-exempt organizations, qualified retirement plans, individual retirement
  accounts and other tax-deferred accounts, financial institutions, insurance
  companies, partnerships or other entities treated as partnerships for U.S. federal
  income tax purposes, real estate investment trusts, regulated investment companies,
  broker-dealers, non-resident alien individuals, U.S. Holders whose functional
  currency is not the U.S. dollar, persons subject to the alternative minimum
  tax, persons who hold our common shares as part of a straddle, hedging or conversion
  transaction, and persons who own, actually or constructively, 10% or more of
  our common shares.

For purposes of this discussion, a U.S. Holder means a holder
of our common shares who is (i) a citizen or an individual resident of the U.S.,
(ii) a corporation, or other entity treated as a corporation for U.S. federal
income tax purposes, created or organized in or under the laws of the U.S., any
state thereof or the District of Columbia, (iii) an estate the income of which
is subject to.US. federal income taxation regardless of its source, or (iv) a
trust if it is subject to the primary supervision of a court within the U.S. and
one or more U.S. persons, as defined in the Code, have the authority to
control all substantial decisions of the trust or (2) has a valid election in
effect under applicable Treasury regulations to be treated as a U.S. person.

If a partnership (or any other entity treated as a partnership
for U.S. federal income tax purposes) holds our common shares, the tax treatment
of a partner in such partnership will generally depend on the status of the
partner and the activities of the partnership. Such a partner should consult its
own tax advisors as to the U.S. federal income tax consequences of being a
partner in a partnership that holds or disposes of our common shares.

This discussion addresses only certain aspects of U.S. federal
income taxation to U.S. Holders. U.S. Holders should consult their own tax
advisors regarding the U.S. federal, state, local, non-U.S. and other tax
consequences of the ownership and disposition of our common shares.

Distributions on Our Common Shares. Subject to the
discussion below under Passive Foreign Investment Company, U.S. Holders
receiving dividend distributions (including constructive dividends) with respect
to our common shares generally are required to include in gross income for U.S.
federal income tax purposes the gross amount of such distributions (without
reduction for any Canadian income or other tax withheld from such
distributions), equal to the U.S. dollar value of such distributions on the date
of receipt (based on the exchange rate on such date), to the extent that we have
current or accumulated earnings and profits (as determined for U.S. federal
income tax purposes). To the extent that the amount of the distribution exceeds
our current and accumulated earnings and profits, it will be treated as a return
of capital to the extent of a U.S. Holders adjusted tax basis in our common
shares and thereafter as capital gain from the sale or exchange of such common
shares. We do not intend to calculate our earnings and profits under U.S.
federal income tax principles. Therefore, a U.S. Holder should expect that the
full amount of a distribution with respect to the common shares will be treated,
and reported by us, as a dividend.

For taxable years beginning before January 1, 2011, dividends
received by U.S. Holders that are individuals, estates or trusts from a
qualified foreign corporation, as defined in Section 1(h)(11) of the Code,
generally are taxed at the same preferential tax rates applicable to long-term
capital gains. A corporation that is a PFIC, as defined below under Passive
Foreign Investment Company, for its taxable year during which it pays a
dividend, or for its immediately preceding taxable year, however, is not a
qualified foreign corporation. We believe we will meet the definition of a
PFIC and dividends received by U.S. Holders that are individuals, estates or
trusts generally will be subject to U.S. federal income tax at ordinary income
tax rates (and not at the preferential tax rates applicable to long-term capital
gains). Dividends paid on our common shares will not be eligible for the
dividends received deduction provided to corporations receiving dividends from
certain U.S. corporations.

In the case of foreign currency received as a dividend that is
  not converted by the recipient into U.S. dollars on the date of receipt, a U.S.
  Holder will have a tax basis in the foreign currency equal to its U.S. dollar
  value on the date of receipt. Generally any gain or loss recognized upon a subsequent
  sale or other disposition of the foreign currency, including the exchange for
  U.S. dollars, will be ordinary income or loss.

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Disposition of Our Common Shares. Subject to the discussion
  below under Passive Foreign Investment Company, U.S. Holders will
  recognize gain or loss upon the sale of our common shares equal to the difference,
  if any, between (i) the amount of cash plus the fair market value of any property
  received, and (ii) the U.S. Holders tax basis in our common shares. A
  U.S. Holders tax basis in the shares generally will be equal to the amount
  such U.S. Holder paid for the shares, subject to adjustments. Any gain or loss
  on disposition of our common shares generally will be U.S. source gain or loss
  and will be capital gain or loss. If, at the time of the disposition, a U.S.
  holder is treated as holding the common shares for more than one year, such
  gain or loss will be a long-term capital gain or loss. Long-term capital gain
  recognized by a non-corporate U.S. holder is currently subject to taxation at
  a reduced rate. The deductibility of capital losses is subject to limitations.

Passive Foreign Investment Company. We believe that we
will meet the definition of passive foreign investment company (PFIC) within
the meaning of Sections 1291 through 1298 of the Code. A U.S. Holder who holds
stock in a non-U.S. corporation during any year in which such corporation is a
PFIC is subject to numerous special U.S. federal income tax rules. A non-U.S.
corporation is considered to be a PFIC for any taxable year if either:

| |  | at least 75% of its gross income is passive income (the
      income test), or                                                                                                                                                                       
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                                                        
| |  | at least 50% of the value of its assets (based on an
      average of the quarterly values of the assets during a taxable year) is
      attributable to assets that produce or are held for the production of
      passive income (the asset test).

For purposes of the income test and the asset test,
respectively, we will be treated as earning our proportionate share of the
income and owning our proportionate share of the assets of any other corporation
in which we own, directly or indirectly, 25% or more (by value) of the stock. In
addition, for purposes of the income test, passive income does not include any
interest, dividends, rents, or royalties received or accrued by us from a
related person (as defined in Section 954(d)(3) of the Code), to the extent
such items are properly allocable to income of such related person that is not
passive.

We must make a separate determination each year as to whether
we are a PFIC. As a result, our PFIC status may change. In particular, because
the total value of our assets for purposes of the asset test will be calculated
using the market price of our common shares (assuming that we continue to be a
publicly traded corporation for purposes of the PFIC rules), our PFIC status
will depend in large part on the market price of our common shares. Accordingly,
fluctuations in the market price of our common shares may result in our being a
PFIC for any year. If we are a PFIC for any year during which a U.S. Holder
holds our common shares, we generally will continue to be treated as a PFIC for
all succeeding years during which such U.S. Holder holds the common shares,
absent a special election. For instance, if we cease to be a PFIC, a U.S. Holder
may avoid some of the adverse effects of the PFIC regime by making a deemed sale
election with respect to our common shares pursuant to which such U.S. Holder
recognizes gain (which will be taxed under the default PFIC tax rules discussed
below) as if such common shares had been sold on the last day of the last
taxable year for which we were a PFIC. If we are a PFIC for any taxable year and
any of our non-U.S. subsidiaries is also a PFIC, a U.S. Holder would be treated
as owning a proportionate amount (by value) of the shares of the lower-tier PFIC
for purposes of the application of these rules. U.S. Holders are urged to
consult their tax advisors about the application of the PFIC rules to any of our
subsidiaries.

If we are a PFIC for any taxable year during which a U.S.
Holder holds our common shares, such U.S. Holder will be subject to special tax
rules with respect to any excess distribution that it receives and any gain it
realizes from a sale or other disposition (including a pledge) of the common
shares, unless the U.S. Holder makes a mark-to-market election, as discussed
below. Distributions received by a U.S. Holder in a taxable year that are
greater than 125% of the average annual distributions such U.S. Holder received
during the shorter of the three preceding taxable years and its holding period
for the common shares will be treated as an excess distribution. Under these
special tax rules:

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- the excess distribution or gain will be allocated ratably over the U.S.
  Holders holding period for the common shares:
- the amount allocated to the current taxable year and any taxable year prior
  to the first taxable year in which we became a PFIC will be treated as
  ordinary income, and
- the amount allocated to each other taxable year will be subject to the
  highest tax rate in effect for that year and the interest charge generally
  applicable to underpayments of tax will be imposed on the resulting tax
  attributable to each such year.

The tax liability for amounts allocated to taxable years prior
to the year of disposition or excess distribution cannot be offset by any net
operating losses for such years, and gains (but not losses) realized on the
disposition of the common shares cannot be treated as capital, even if the U.S .
Holder holds the common shares as capital assets.

Alternatively, a U.S. Holder of marketable stock (as defined
below) in a PFIC may make a mark-to-market election with respect to shares of a
PFIC to elect out of the tax treatment discussed above. If a U.S. Holder makes a
valid mark-to-market election for the common shares, the U.S. Holder will
include in income each year an amount equal to the excess, if any, of the fair
market value of the common shares as of the close of its taxable year over its
adjusted basis in such common shares. The U.S. Holder is allowed a deduction for
the excess, if any, of the adjusted basis of the common shares over their fair
market value as of the close of the taxable year. However, deductions are
allowable only to the extent of any net mark-to-market gains on the common
shares included in the U.S. Holders income for prior taxable years. Amounts
included in a U.S. Holders income under a mark-to-market election, as well as
gain on the actual sale or other disposition of the common shares, are treated
as ordinary income. Ordinary loss treatment also applies to the deductible
portion of any mark-to-market loss on the common shares, as well as to any loss
realized on the actual sale or disposition of the common shares, to the extent
that the amount of such loss does not exceed the net mark-to-market gains
previously included for such common shares. A U.S. Holders basis in the common
shares will be adjusted to reflect any such income or loss amounts. If a U.S.
Holder makes such an election, the tax rules that ordinarily apply to
distributions by corporations that are not PFICs would apply to distributions by
us, except that the preferential tax rates applicable to long-term capital gains
on dividends received from a qualified foreign corporation discussed above
under Distributions on the Common Shares would not apply.

Although a U.S. Holder may be eligible to make a mark-to-market
election with respect to our common shares, no such election may be made with
respect to the stock of any of our non-U.S. subsidiaries that is also a PFIC and
that a U.S. Holder is treated as owning, because such stock is not marketable.
Hence, the mark-to-market election will not be effective to eliminate the
interest charge described above with respect to deemed dispositions of
subsidiary PFIC stock or distributions from a subsidiary PFIC.

The mark-to-market election is available only for marketable
stock, which is stock that is traded in other than de minimis quantities on at
least 15 days during each calendar quarter on a qualified exchange, including
the Toronto Stock Exchange and the NYSE Amex, or other market, as defined in
applicable U.S. Treasury regulations. We expect that our common shares will
continue to be listed on each of the Toronto Stock Exchange and the NYSE Amex on
at least 15 days during each calendar quarter and traded in other than de
minimis quantities, and, consequently, the mark-to-market election would be
available to U.S. Holders of common shares if we were to be a PFIC.

If a non-U.S. corporation is a PFIC, a holder of shares in that
corporation can avoid taxation under the rules described above by making a
qualified electing fund election to include the holders share of the
corporations income on a current basis in gross income. However, a U.S. Holder
can make a qualified electing fund election with respect to its common shares
only if we furnish the U.S. Holder annually with certain tax information, and we
do not intend to prepare or provide such information.

Congress recently enacted the Hiring Incentives to Restore Employment
  Act (HIRE). Under HIRE, U.S. Holders of a PFIC are required to file
  an annual report containing any information that may be required by the Treasury.
  While these information requirements have not yet been specified by the Treasury,
  a U.S. Holder that holds common shares in any year in which we are a PFIC generally
  will be required to file IRS Form 8621 regarding distributions received on the
  common shares and any gain realized on the disposition of the common shares.

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U.S. Holders are urged to consult their tax advisors regarding
  the application of the PFIC rules to their investment in our common shares.

Foreign Tax Credits. Subject to certain conditions and
limitations, including potential limitations under the United States-Canada
treaty, Canadian taxes paid on or withheld from distributions from us and not
refundable to a U.S. Holder may be, at the election of such U.S. Holder, either
credited against such U.S. Holders U.S. federal income tax liability or
deducted from such U.S. Holders taxable income. Generally, a credit will reduce
a U.S. Holders U.S. federal income tax liability on a dollar-for-dollar basis,
whereas a deduction will reduce a U.S. Holder s income subject to U.S. federal
income tax. This election is made on a year-by-year basis and applies to all
foreign taxes paid by or withheld from a U.S. Holder that year.

Complex limitations apply to the foreign tax credit, including
the general limitation that the credit cannot exceed the proportionate share of
a U.S. Holders U.S. federal income tax liability that such U.S. Holders
foreign source taxable income bears to such U.S. Holders worldwide taxable
income. In applying this limitation, a U.S. Holders various items of income and
deduction must be classified, under complex rules, as either foreign source or
U.S. source. In addition, this limitation is calculated separately with
respect to specific categories of income. Dividends paid by us generally will
constitute foreign source income and generally will be categorized as passive
category income.

Because the rules governing foreign tax credits are complex,
U.S. Holders should consult their own tax advisors regarding the availability of
foreign tax credits in their particular circumstances.

Information Reporting; Backup Withholding.In general,
payments made in the U.S. or through certain U.S. related financial
intermediaries with respect to the ownership and disposition of our common
shares will be required to be reported to the IRS unless the U.S. Holder is a
corporation or other exempt recipient and, when required, demonstrates this
fact. In addition, a U.S. Holder may be subject to a backup withholding tax
(currently at a rate of 28%) on such payments unless the U.S. Holder (i) is a
corporation or other exempt recipient and when required, demonstrates this fact
or (ii) provides a taxpayer identification number and otherwise timely complies
with applicable certification requirements. U.S. Holders should consult their
tax advisors regarding their qualification for an exemption from backup
withholding and the procedures for obtaining such an exemption, if applicable.
Backup withholding is not an additional tax. Amounts withheld as backup
withholding may be credited against a U.S. Holders U.S. federal income tax
liability and such U.S. Holder may obtain a refund of any excess amounts
withheld by filing the appropriate claim for refund with the IRS and furnishing
any required information in a timely manner.

THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH
ABOVE IS FOR GENERAL INFORMATION PURPOSES ONLY, DOES NOT PURPORT TO BE A
COMPLETE DESCRIPTION OF THE POTENTIAL TAX CONSIDERATIONS RELATING TO OUR COMMON
SHARES AND IS NOT TAX ADVICE. U.S. HOLDERS ARE URGED TO CONSULT THEIR TAX
ADVISORS REGARDING THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE OWNERSHIP AND
DISPOSITION OF OUR COMMON SHARES.

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|F. | Dividends and Paying
Agents
|-- | ---------------------------

Not Applicable.

|G. | Statement by Experts
|-- | --------------------

Not Applicable.

|H. | Documents on Display
|-- | --------------------

All documents referred to in this Form 20-F are available for
inspection at our office, listed below, during normal office hours.

| | PolyMet Mining Corp.      
| | --------------------------
| | #390  3600 Lysander Lane 
| | Richmond, British Columbia
| | V7B 1C3 Canada            

We are subject to the informational requirements of the
Exchange Act. In accordance with these requirements, we file reports and other
information with the SEC. These materials, including this annual report on Form
20-F and its exhibits, may be inspected and copied at the SECs Public Reference
Room at 100 F Street, N.E., Washington, D.C. 20549 and at the SECs regional
office at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of the materials may be obtained from the Public Reference Room of the
Commission at 100 F. Street, N.E., Washington, D.C. 20549 at prescribed rates.
The public may obtain information on the operation of the Commissions Public
Reference Room by calling the Commission in the United States at 1-800-SEC-0330.

Our reports, registration statements and other information can
also be inspected on EDGAR available on the SECs website at
www.sec.gov.

In Canada, additional information, including directors and
officers remuneration and indebtedness, principal holders of our securities and
securities authorized for issuance under equity compensation plans, is contained
in our Management Information Circular for our most recent annual meeting of
securityholders that involved the election of directors.

Additional financial information is provided in our financial
statements and MD&A, copies of which can be obtained by contacting our
Corporate Secretary in writing at 390  3600 Lysander Lane, Richmond, British
Columbia V7B 1C3 or by e-mail at info@polymetmining.com. Copies of such documents will
be provided to shareholders free of charge.

Additional information relating to PolyMet may be found on the
System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com.

|I. | Subsidiary Information
|-- | ----------------------

Not Applicable

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK

We may be subject to foreign currency exchange rate risk, because
  we hold funds and financial instruments in Canadian dollars but report our financial
  information using the U.S. dollar. If we hold onto funds obtained from financings,
  currently our only means to obtain funds, in Canadian dollar accounts and the
  Canadian dollar depreciates in comparison to the U.S. the fair value of our
  funds will decrease and will be reported on our financial statements at this
  depressed conversion rate. If the Canadian dollar appreciates as compared to
  the U.S. dollar, however, fair value of any financial instruments or funds held
  will increase and be reported on our financial statements based on this favorable
  conversion rate. Our current exposure, however, is not sufficient to have a
  material effect on our results of operations and financial condition.

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Moreover, we periodically access the capital markets with the
  issuance of new shares to fund operating expenses, and we do not maintain significant
  cash reserves over periods of time that could be materially affected by fluctuations
  in interest rates or foreign exchange rates.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY
SECURITIES

Not Applicable.

ITEM 13. DEFAULT, DIVIDEND ARREARAGES AND
DELINQUENCIES

None.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHT OF SECURITY
HOLDERS AND USE OFPROCEEDS

Shareholder Rights Plan

Effective May 25, 2007, the Company adopted an updated
Shareholder Rights Plan (Rights Plan), which was approved by the Companys
shareholders on June 27, 2007 and modified by the Companys shareholders on
June 17, 2008. Under the Rights Plan, the Company has issued one right for no
consideration in respect of each outstanding common share of the Company to all
holders of record of common shares on December 4, 2003. All common shares
subsequently issued by the Company during the term of the Rights Plan will have
one right represented for each common share held by the shareholder of the
Company. The term of the Rights Plan is 10 years, unless the rights are earlier
redeemed or exchanged. The Rights issued under the Rights Plan become
exercisable only if a party acquires 20% or more of the Company's common shares
without complying with the Rights Plan or without the approval of the Board of
Directors of the Company.

Each Right entitles the registered holder thereof to purchase
from the Company on the occurrence of certain events, one common share of the
Company at the price of CDN$50 per share, subject to adjustment (the Exercise
Price). However, if a Flip-in Event (as defined in the Rights Plan) occurs,
each Right would then entitle the registered holder to receive, upon payment of
the Exercise Price, that number of common shares that have a market value at the
date of that occurrence equal to twice the Exercise Price. The Rights are not
exercisable until the Separation Time as defined in the Rights Plan.

The Shareholder Rights Plan has previously been filed as
Exhibit 14.1.

ITEM 15. CONTROLS AND PROCEDURES

A. Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Annual Report, an
  evaluation was performed under the supervision and with the participation of
  our management, including the chief executive officer and chief financial officer,
  of the effectiveness of the design and operation of our disclosure controls
  and procedures (as defined in Rule 13a-15 of the Exchange Act). Based on that
  evaluation, our management, including the chief executive officer and chief
  financial officer, concluded that at 31 January 2011 the Companys disclosure
  controls and procedures were effective in providing reasonable assurance that
  material information required to be disclosed by us in the reports that we file
  or submit under the Exchange Act, is recorded, processed, summarized and reported
  within the time periods specified in the SECs rules and forms. In reaching
  this conclusion, the Company recognizes two factors that must be and are present:

- 60 -

---

| | a) | the Company is dependent upon its advisors and
      consultants (primarily legal counsel) to assist in recognizing,
      interpreting and understanding and complying with the various securities
      regulations disclosure requirements, and
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) | an active board of directors and management with open
      lines of communication.                                                                                                                                                               

B. Management's Annual Report on Internal Control over
Financial Reporting

Our management is responsible for  establishing and maintaining adequate internal control over financial  reporting.  Internal  control over financial reporting is a process designed to  provide reasonable assurance regarding the reliability of financial reporting and  the preparation of the Consolidated  Financial Statements for external reporting purposes  in accordance with GAAP.

Internal control over  financial reporting, no matter how well designed, has inherent  limitations.  Also, projections of any  evaluation of effectiveness to future periods are subject to the risk that controls may  become inadequate because of changes in conditions, or that the degree of  compliance with the policies or procedures may deteriorate.

Management has assessed the effectiveness of our  internal control over financial reporting as at January 31, 2011.  In making its assessment, management has used  the criteria established in Internal Control - Integrated Framework issued by  the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)  to evaluate the our internal control over  financial reporting.

Management identified a  material weakness in our  internal control over financial reporting relating to timely  preparation of financial statements and key schedules for  internal review.  The underlying cause of the material weakness  was the implementation of a new accounting and financial reporting system  during the third fiscal quarter.   Termination of an outsource accounting service provider and use of  non-accounting personnel to undertake accounting duties exacerbated the problems of timeliness. Prior  to filing its  financial statements for the year ended January 31, 2011, management had taken  steps to address this weakness and plans further changes to our internal  controls in the light of continued problems in the year-end reporting.  Based on this assessment, management has  concluded that we did not maintain, in all material respects, effective  internal control over financial reporting as at January 31, 2011.

C. Attestation Report of the Registered Public Accounting
Firm

The attestation report of PricewaterhouseCoopers with respect
to the Companys internal control over financial reporting is filed with Item 18
of this Annual Report.

- 61 -

---

D. Changes in Internal Controls

During the quarter ended October  31, 2010,  we  experienced difficulties moving to a new accounting and financial reporting  system.  These difficulties were  primarily in the input and review of  transactions and in particular concerned the accurate recording of foreign  exchange and intercompany transactions. Termination of an outsource accounting service  provider and use of non-accounting personnel to undertake accounting duties  exacerbated the problems.

Management undertook  a rigorous process to ensure that all transactions were recorded completely and  accurately in the accounting records. As  a result of these difficulties and this review  process, we were unable to meet our  filing deadline to provide consolidated financial statements, management’s  discussion and analysis and CEO and CFO certifications for its  quarter ended 31 October  2010.

Management recognized the need  to implement  changes to our  internal control over financial reporting relating to the input and  review of all transactions, including foreign  exchange and intercompany transactions.  Since  filing the third quarter interim financials, Management has  been implementing changes to our internal control over  financial reporting including strengthening the segregation of duties,  reallocating responsibilities, and strengthening the  financial reporting team.  We are in the process of engaging  independent advise in connection with complex accounting  issues and tax,

Management has made significant progress, but  implementation of the changes was not sufficiently complete during preparation  of year-end financial statements and, as a consequence, we were unable  to meet our filing deadline to provide consolidated  financial statements, management’s discussion and analysis and CEO and CFO  certifications for its year ended January 31, 2011.

Management recognizes  the lack of timely preparation of financial information and key schedules to be  a Material Weakness in its internal control over financial reporting.  Management believes that the changes  described, once more fully implemented, will ensure  the timely provision of financial information to our  shareholders in future,  in accordance with the filing deadlines established by regulators.

There have been no other changes in our  internal control over financial reporting during the year ended January 31,  2011 that have materially affected, or are reasonably likely to materially  affect, internal control over financial reporting.

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

As of January 31, 2011, the audit committee consisted of three
directors. All three members of the Audit Committee, W. Ian L. Forrest, Frank L.
Sims, and Stephen Rowland meet the criteria of an Audit Committee Financial
Expert under the applicable rules and regulations of the SEC, and each of their
designation as an Audit Committee Financial Expert has been ratified by the
Board. All three members of the Audit Committee are independent, as that term
is defined in the New York Stock Exchange Amex listing standards.

ITEM 16B. CODE OF ETHICS

We have adopted Code of Ethics, effective April 5, 2006, which
applies to all our employees, including our directors and executive officers,
including our principal executive, financial and accounting officers, and
persons performing similar functions. The Code of Ethics covers areas of
professional and business conduct, and is intended to promote honest and ethical
behavior, including fair dealing and the ethical handling of conflicts of
interest, support full, fair, accurate, and timely disclosure in reports and
documents we file with, or submit to, the SEC and other governmental
authorities, and in its other public communications; deter wrongdoing; encourage
compliance with applicable laws, rules, and regulations; and to ensure the
protection of our legitimate business interests. We also encourage our
directors, officers, employees and consultants to promptly to report any
violations of the Code of Ethics.

The Code has previously been filed as Exhibit 11.1.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following outlines the expenditures for accounting fees
billed and paid for the last two fiscal periods ended:

Financial Year Ending
    Audit Fees
    Audit Related Fees
    Tax Fees1
    All Other FeesJanuary 31, 2011
    CDN
      $225,000
    CDN
      $111,000
    CDN
      $14,400
    CDN
      $NilJanuary 31, 2010
    CDN
      $231,392
    CDN
      $126,500
    CDN
      $13,906
    CDN
      $Nil


- 62 -

---

| | 1 | Audit Related Fees are the aggregate fees billed for
      assurance and related services that are reasonably related to the
      performance of the audit and are not reported under Audit Fees.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2 | Tax fees consist of fees to prepare the Companys annual
      tax filings.                                                                                                                       

Pre-Approval Policies and Procedures

All of the fees paid to our auditors, PricewaterhouseCoopers
LLP, were pre-approved by our Audit Committee. This pre-approval involved a
submission by our auditors to our Audit Committee of a scope of work to complete
the audit and prepare tax returns, an estimate of the time involved, and a
proposal for the fees to be charged for the audit. The Audit Committee reviewed
this proposal with our management and after discussion with our auditors,
pre-approved the scope of work and fees.

- 63 -

---

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
  COMMITTEES

Not applicable.

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER
  AND AFFILIATEDPURCHASERS

Not applicable.

ITEM 16F. CHANGES IN REGISTRANTS CERTIFYING ACCOUNTANT

Not applicable.

ITEM 16G. CORPORATE GOVERNANCE

Our corporate governance practices do not differ in any
significant way from those followed by U.S. domestic companies listed on the
NYSE Amex.

PART III

ITEM 17. FINANCIAL STATEMENTS

Not applicable.

ITEM 18. FINANCIAL STATEMENTS

Our financial statements are stated in United States Dollars
(US$) and are prepared in accordance with Canadian Generally Accepted Accounting
Principles; the application of which, in our case, conforms in all material
respects for the periods presented with U.S. GAAP, except as disclosed in
footnotes to the financial statements.

Index to Financial Statements

Description
      PageManagements Responsibility
        for the Financial Statements
      F-1Report of Independent Registered Public
        Accounting Firm
      F-2Consolidated Balance
        Sheet
      F-5Consolidated Statements of Loss, Other
        Comprehensive Loss and Deficits
      F-6Consolidated Statements
        of Shareholders Equity
      F-7Consolidated Statements of Cash Flows
      F-8Notes to Consolidated
        Financial Statements
      F-9


- 64 -

---

POLYMET MINING CORP.(a development stage company)

CONSOLIDATED FINANCIAL STATEMENTS

31 January 2011, 2010 and 2009

U.S. Funds

---

Management Report

Managements Responsibility for Consolidated Financial
  Statements

The accompanying Consolidated Financial Statements of PolyMet
  Mining Corp. (the Company) are the responsibility of management. The Consolidated
  Financial Statements have been prepared by management in accordance with Canadian
  generally accepted accounting principles (GAAP) and include certain
  estimates that reflect managements best judgments.

The Companys Board of Directors has approved the information
  contained in the Consolidated Financial Statements. The Board of Directors fulfills
  its responsibilities regarding the Consolidated Financial Statements mainly
  through its Audit Committee, which has a written mandate that complies with
  current requirements of Canadian securities legislation and the United States
  Sarbanes-Oxley Act of 2002. The Audit Committee meets at least on a quarterly
  basis.

Managements Annual Report on Internal Control over
  Financial Reporting

Management is also responsible for establishing and maintaining
  adequate internal control over financial reporting. Internal control over financial
  reporting is a process designed to provide reasonable assurance regarding the
  reliability of financial reporting and the preparation of the Consolidated Financial
  Statements for external reporting purposes in accordance with GAAP.

Internal control over financial reporting, no matter how well
  designed, has inherent limitations. Also, projections of any evaluation of effectiveness
  to future periods are subject to the risk that controls may become inadequate
  because of changes in conditions, or that the degree of compliance with the
  policies or procedures may deteriorate.

Management has assessed the effectiveness of the Company’s internal control over financial reporting as at 31 January 2011.  In making its assessment, management has used the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) to evaluate the Company’s internal control over financial reporting.

Management identified a material weakness in its internal control over financial reporting relating to timely preparation of financial statements and key schedules for internal review.  The underlying cause of the material weakness was the implementation of a new accounting and financial reporting system during the third fiscal quarter.  Termination of an outsource accounting service provider and use of non-accounting personnel to undertake accounting duties exacerbated the problems of timeliness. Prior to filing its financial statements for the year ended 31 January 2011, management had taken steps to address this weakness and plans further changes to its internal controls in the light of continued problems in the year-end reporting.  Based on this assessment, management has concluded that the Company did not maintain, in all material respects, effective internal control over financial reporting as at January 31, 2011.

The effectiveness of the Companys internal control over
  financial reporting as at 31 January 2011 has been audited by PricewaterhouseCoopers
  LLP, our independent auditors, as stated in their report which appears herein.

|Joseph Scipioni(signed)             |  | Douglas Newby(signed)
|------------------------------------- |  | -----------------------
|                                      |  |                        
|Joseph Scipioni                       |  | Douglas Newby          
|President and Chief Executive Officer |  | Chief Financial Officer

F-1

---

Independent Auditors Report

To theShareholders of PolyMet Mining Corp.

We have completed integrated audits of PolyMet Mining Corp.s
  2011, 2010 and 2009 consolidated financial statements and an audit of the effectiveness
  of the Companys internal control over financial reporting as at January
  31, 2011. Our opinions, based on our audits, are presented below.

Report on the consolidated financial statementsWe have audited the accompanying consolidated financial statements of PolyMet
  Mining Corp., which comprise the consolidated balance sheets as at January 31,
  2011 and January 31, 2010 and the consolidated statements of loss, other comprehensive
  loss and deficit, changes in shareholders equity, and cash flows for each
  of the three years in the period ended January 31, 2011, and the related notes
  including a summary of significant accounting policies.

Managements responsibility for the consolidated financial
  statementsManagement is responsible for the preparation and fair presentation of these
  consolidated financial statements in accordance with Canadian generally accepted
  accounting principles and for such internal control as management determines
  is necessary to enable the preparation of consolidated financial statements
  that are free from material misstatement, whether due to fraud or error.

Auditors responsibilityOur responsibility is to express an opinion on these consolidated financial
  statements based on our audits. We conducted our audits in accordance with Canadian
  generally accepted auditing standards and the standards of the Public Company
  Accounting Oversight Board (United States). Those standards require that we
  plan and perform an audit to obtain reasonable assurance about whether the consolidated
  financial statements are free from material misstatement. Canadian generally
  accepted auditing standards require that we comply with ethical requirements.

An audit involves performing procedures to obtain audit evidence,
  on a test basis, about the amounts and disclosures in the consolidated financial
  statements. The procedures selected depend on the auditors judgment, including
  the assessment of the risks of material misstatement of the consolidated financial
  statements, whether due to fraud or error. In making those risk assessments,
  the auditor considers internal control relevant to the companys preparation
  and fair presentation of the consolidated financial statements in order to design
  audit procedures that are appropriate in the circumstances. An audit also includes
  evaluating the appropriateness of accounting principles and policies used and
  the reasonableness of accounting estimates made by management, as well as evaluating
  the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits
  is sufficient and appropriate to provide a basis for our audit opinion on the
  consolidated financial statements.

OpinionIn our opinion, the consolidated financial statements present fairly, in
  all material respects, the financial position of PolyMet Mining Corp. as at
  January 31, 2011 and January 31, 2010 and the results of its operations and
  cash flows for each of the three years in the period ended January 31, 2011
  in accordance with Canadian accepted accounting principles

F-2



---

Emphasis of matterWithout qualifying our opinion, we draw your attention to Note 1 in the
  consolidated financial statements which discloses conditions that indicate the
  existence of a material uncertainty that may cast significant doubt about the
  Companys ability to continue as a going concern.

Report on internal control over financial reportingWe have also audited PolyMet Mining Corp.s internal control over financial
  reporting as at January 31, 2011, based on criteria established in Internal
  Control - Integrated Framework, issued by the Committee of Sponsoring Organizations
  of the Treadway Commission (COSO).

Managements responsibility for internal control over
  financial reportingManagement is responsible for maintaining effective internal control over
  financial reporting and for its assessment of the effectiveness of internal
  control over financial reporting included in Managements Annual Report
  on Internal Control over Financial Reporting.

Auditors responsibilityOur responsibility is to express an opinion on the companys internal
  control over financial reporting based on our audit. We conducted our audit
  of internal control over financial reporting in accordance with the standards
  of the Public Company Accounting Oversight Board (United States). Those standards
  require that we plan and perform the audit to obtain reasonable assurance about
  whether effective internal control over financial reporting was maintained in
  all material respects.

An audit of internal control over financial reporting includes
  obtaining an understanding of internal control over financial reporting, assessing
  the risk that a material weakness exists, testing and evaluating the design
  and operating effectiveness of internal control, based on the assessed risk,
  and performing such other procedures as we consider necessary in the circumstances.

We believe that our audit provides a reasonable basis for our
  audit opinion on the Companys internal control over financial reporting.

Definition of internal control over financial reportingA companys internal control over financial reporting is a process
  designed to provide reasonable assurance regarding the reliability of financial
  reporting and the preparation of financial statements for external purposes
  in accordance with generally accepted accounting principles. A companys
  internal control over financial reporting includes those policies and procedures
  that (i) pertain to the maintenance of records that, in reasonable detail, accurately
  and fairly reflect the transactions and dispositions of the assets of the company;
  (ii) provide reasonable assurance that transactions are recorded as necessary
  to permit preparation of financial statements in accordance with generally accepted
  accounting principles, and that receipts and expenditures of the company are
  being made only in accordance with authorizations of management and directors
  of the company; and (iii) provide reasonable assurance regarding prevention
  or timely detection of unauthorized acquisition, use, or disposition of the
  companys assets that could have a material effect on the financial statements.

A material weakness is a deficiency, or a combination of deficiencies,
  in internal control over financial reporting, such that there is a reasonable
  possibility that a material misstatement of the Companys annual consolidated
  financial statements will not be prevented or detected on a timely basis. It
  was determined that the Company did not maintain effective internal control
  over financial reporting as at January 31, 2011, because of a material weakness
  identified in the timely reporting and review of financial information. This
  material weakness is described in the accompanying Managements Annual
  Report on Internal Control over Financial Reporting. We considered this material
  weakness in determining the nature, timing and extent of audit tests applied
  in our audit of the January 31, 2011 consolidated financial statements, and
  our opinion regarding the effectiveness of the Companys internal control
  over financial reporting does not affect our opinion on those consolidated financial
  statements.

F-3



---

Inherent limitationsBecause of its inherent limitations, internal control over financial reporting
  may not prevent or detect misstatements. Also, projections of any evaluation
  of effectiveness to future periods are subject to the risk that controls may
  become inadequate because of changes in conditions or that the degree of compliance
  with the policies or procedures may deteriorate.

OpinionIn our opinion, PolyMet Mining Corp. did not maintain, in all material respects,
  effective internal control over financial reporting as at January 31, 2011 based
  on criteria established in Internal Control - Integrated Framework, issued by
  COSO.

(signed)
  PricewaterhouseCoopers LLP

Chartered Accountants

May 6, 2011
  Vancouver, British Columbia, Canada

F-4

---

|PolyMet Mining Corp.                    
|----------------------------------------
|(a development stage company)           
|Consolidated Balance Sheets             
|As at January 31                        
|All figures in Thousands of U.S. Dollars

|ASSETS                                                        |   | 2011    |   |   | 2010    |  
|------------------------------------------------------------- | - | ------- | - | - | ------- | -
|Current                                                       |   |         |   |   |         |  
|Cash and equivalents                                          | $ | 10,361  |   | $ | 21,282  |  
|Accounts receivable and advances                              |   | 318     |   |   | 88      |  
|Investment (Note 13)                                          |   | 66      |   |   | 140     |  
|Prepaid expenses                                              |   | 636     |   |   | 512     |  
|                                                              |   | 11,381  |   |   | 22,022  |  
|Asset Held for Sale(Notes 4 and 14d))                         |   | 3,420   |   |   | -       |  
|Deferred Financing Costs(Note 14c))                           |   | -       |   |   | 1,794   |  
|Mineral Property, Plant and Equipment(Notes 3 and
      4)    |   | 130,231 |   |   | 115,832 |  
|                                                              | $ | 145,032 |   | $ | 139,648 |  
|                                                              |   |         |   |   |         |  
|LIABILITIES                                                   |   |         |   |   |         |  
|Current                                                       |   |         |   |   |         |  
|Accounts payable and accrued
      liabilities                | $ | 2,444   |   | $ | 2,953   |  
|Current portion of long term debt (Note
      5)              |   | 6,750   |   |   | 2,000   |  
|Current portion of asset
      retirement obligation (Note 6) |   | 1,408   |   |   | 756     |  
|                                                              |   | 10,602  |   |   | 5,709   |  
|Long term                                                     |   |         |   |   |         |  
|Long term debt (Note 5)                                       |   | 1,775   |   |   | 8,529   |  
|Convertible debt (Note
      7)                               |   | 27,633  |   |   | 25,253  |  
|Asset retirement obligation (Note 6)                          |   | 2,404   |   |   | 2,590   |  
|Total Liabilities                                             |   | 42,414  |   |   | 42,081  |  
|                                                              |   |         |   |   |         |  
|SHAREHOLDERS EQUITY                                          |   |         |   |   |         |  
|Share Capital-(Note 8)                                        |   | 142,373 |   |   | 132,066 |  
|Contributed Surplus(Note
      8d)                           |   | 39,083  |   |   | 36,979  |  
|Accumulated Other Comprehensive Income (Loss)                 |   | (6      | ) |   | 71      |  
|Deficit                                                       |   | (78,832 | ) |   | (71,549 | )
|                                                              |   | 102,618 |   |   | 97,567  |  
|Total Liabilities and Shareholders Equity                    | $ | 145,032 |   | $ | 139,648 |  

Nature of Business and Going Concern(Note 1)Contingent Liabilities and Commitments(Notes 4, 6, 8 and 14)Subsequent Event (Note 14f))

ON BEHALF OF THE BOARD:

|William Murray   | ,  Director
|------------------ | -----------
|                   |            
|David Dreisinger | ,  Director

- See Accompanying Notes 

F-5

---

|PolyMet Mining Corp.                                                       
|---------------------------------------------------------------------------
|(a development stage company)                                              
|Consolidated Statements of Loss, Other Comprehensive
      Loss and Deficit
|For the Years Ended 31 January                                             
|All figures in Thousands of U.S. Dollars, except per share
      amounts   

|                                                       |   | 2011        |   |   | 2010        |   |   | 2009        |  
|------------------------------------------------------ | - | ----------- | - | - | ----------- | - | - | ----------- | -
|General and Administrative                             |   |             |   |   |             |   |   |             |  
|Amortization                                           | $ | 31          |   | $ | 31          |   | $ | 31          |  
|Asset retirement obligation accretion                  |   | 383         |   |   | 408         |   |   | 443         |  
|Consulting fees                                        |   | 36          |   |   | 63          |   |   | 45          |  
|Exploration                                            |   | 193         |   |   | -           |   |   | -           |  
|Financing costs write-off (Note 14c))                  |   | 1,830       |   |   | -           |   |   | -           |  
|Investor relations and financing                       |   | 118         |   |   | 420         |   |   | 169         |  
|Office and corporate wages                             |   | 1,198       |   |   | 1,387       |   |   | 1,247       |  
|Professional fees                                      |   | 365         |   |   | 371         |   |   | 512         |  
|Shareholders information                              |   | 330         |   |   | 248         |   |   | 311         |  
|Stock-based compensation (Notes
      8b) and c))      |   | (119        | ) |   | 915         |   |   | 487         |  
|Transfer agent and filing fees                         |   | 99          |   |   | 63          |   |   | 158         |  
|Travel                                                 |   | 267         |   |   | 332         |   |   | 424         |  
|Warrant amendment (Notes 2b), 7 and 8e))               |   | -           |   |   | 4,920       |   |   | 544         |  
|                                                       |   | 4,731       |   |   | 9,158       |   |   | 4,371       |  
|                                                       |   |             |   |   |             |   |   |             |  
|Other Expenses (Income)                                |   |             |   |   |             |   |   |             |  
|Interest income, net                                   |   | 19          |   |   | (5          | ) |   | (154        | )
|Loss (gain) on foreign exchange                        |   | (46         | ) |   | 24          |   |   | 156         |  
|Loss on asset held for sale (Note 4)                   |   | 520         |   |   | -           |   |   | -           |  
|Loss on refinancing of convertible
      debt (Note 7) |   | 3,647       |   |   | -           |   |   | -           |  
|Investment loss (Note 13)                              |   | -           |   |   | -           |   |   | 1,365       |  
|Rental income                                          |   | (198        | ) |   | (154        | ) |   | (215        | )
|                                                       |   | 3,942       |   |   | (135        | ) |   | 1,152       |  
|                                                       |   |             |   |   |             |   |   |             |  
|Loss for the Year before tax                           |   | 8,673       |   |   | 9,023       |   |   | 5,523       |  
|Future income tax recovery  (Notes 8e) and 14c))       |   | (1,390      | ) |   | -           |   |   | -           |  
|Loss for the Year                                      |   | 7,283       |   |   | 9,023       |   |   | 5,523       |  
|                                                       |   |             |   |   |             |   |   |             |  
|Other Comprehensive Income                             |   |             |   |   |             |   |   |             |  
|Unrealized gain (loss) on investment                   |   | (77         | ) |   | 71          |   |   | -           |  
|Comprehensive Income (Loss)                            |   | 7,360       |   |   | 8,952       |   |   | 5,523       |  
|                                                       |   |             |   |   |             |   |   |             |  
|Loss for the Year                                      |   | 7,283       |   |   | 9,023       |   |   | 5,523       |  
|Deficit Beginning of the Year                          |   | 71,549      |   |   | 62,526      |   |   | 57,003      |  
|                                                       |   |             |   |   |             |   |   |             |  
|Deficit End of
      Year                              |   | 78,832      |   |   | 71,549      |   |   | 62,526      |  
|                                                       |   |             |   |   |             |   |   |             |  
|Basic and Diluted
      Loss per Share                 | $ | (0.05       | ) | $ | (0.06       | ) | $ | (0.04       | )
|                                                       |   |             |   |   |             |   |   |             |  
|Weighted Average
      Number of Shares                |   | 149,444,955 |   |   | 139,456,827 |   |   | 137,187,927 |  

- See Accompanying Notes -

F-6

---

|PolyMet Mining Corp.                                            
|----------------------------------------------------------------
|(a development stage company)                                   
|Consolidated Statements of Changes in Shareholders
      Equity
|*All figures in Thousands of U.S. Dollars, except for Shares*   

|                                                                 |  | Common Shares (Note 8) |  |  |               |  |   |         |  |   |             |   |   |               |   |   |         |  
|---------------------------------------------------------------- |  | ---------------------- |  |  | ------------- |  | - | ------- |  | - | ----------- | - | - | ------------- | - | - | ------- | -
|                                                                 |  |                        |  |  |               |  |   |         |  |   |             |   |   | Other         |   |   |         |  
|                                                                 |  | Authorized             |  |  |               |  |   |         |  |   | Contributed |   |   | Comprehensive |   |   | Deficit |  
|                                                                 |  | Shares                 |  |  | Issued Shares |  |   | Amount  |  |   | Surplus     |   |   | Income        |   |   |         |  
|Balance  31 January 2008                                        |  | Unlimited              |  |  | 136,991,075   |  | $ | 104,615 |  | $ | 20,825      |   | $ | -             |   | $ | (57,003 | )
|Loss for the year                                                |  | -                      |  |  | -             |  |   | -       |  |   | -           |   |   |               |   |   | (5,523  | )
|Shares and warrants
      issued:                                |  |                        |  |  |               |  |   |         |  |   |             |   |   |               |   |   |         |  
|Exercise of
      options                                        |  | -                      |  |  | 312,800       |  |   | 452     |  |   | -           |   |   |               |   |   | -       |  
|Fair
      value of stock options exercised                      |  | -                      |  |  | -             |  |   | 245     |  |   | (245        | ) |   |               |   |   | -       |  
|Convertible debt  conversion
      factor and warrants (Note 7) |  | -                      |  |  | -             |  |   | -       |  |   | 691         |   |   |               |   |   | -       |  
|Accrual of Milestones
      2 and 4 Bonus Shares (Note 14)       |  | -                      |  |  | -             |  |   | -       |  |   | 3,912       |   |   |               |   |   | -       |  
|Amendment to previously issued warrants
      (Note 8e))         |  | -                      |  |  | -             |  |   | -       |  |   | 544         |   |   |               |   |   | -       |  
|Stock-based compensation                                         |  | -                      |  |  | -             |  |   | -       |  |   | 1,822       |   |   |               |   |   | -       |  
|Balance  31 January 2009                                        |  | Unlimited              |  |  | 137,303,875   |  | $ | 105,312 |  | $ | 27,549      |   | $ | -             |   | $ | (62,526 | )
|Loss for the year                                                |  | -                      |  |  | -             |  |   | -       |  |   | -           |   |   |               |   |   | (9,023  | )
|Other comprehensive income for the
      period                  |  | -                      |  |  | -             |  |   | -       |  |   | -           |   |   | 71            |   |   | -       |  
|Shares and warrants
      issued:                                |  |                        |  |  |               |  |   |         |  |   |             |   |   |               |   |   |         |  
|Equity offering
      and issuance costs                         |  | -                      |  |  | 9,433,962     |  |   | 24,501  |  |   | -           |   |   |               |   |   | -       |  
|Exercise
      of options                                        |  | -                      |  |  | 775,000       |  |   | 477     |  |   | -           |   |   |               |   |   | -       |  
|Fair value
      of stock options exercised                      |  | -                      |  |  | -             |  |   | 307     |  |   | (307        | ) |   |               |   |   | -       |  
|Exercise
      of warrants                                       |  | -                      |  |  | 167,954       |  |   | 494     |  |   | -           |   |   |               |   |   | -       |  
|Fair value
      of warrants exercised                           |  | -                      |  |  | -             |  |   | 254     |  |   | (254        | ) |   |               |   |   | -       |  
|Convertible debt 
      conversion factor and warrants (Note 7) |  | -                      |  |  | -             |  |   | -       |  |   | 352         |   |   |               |   |   | -       |  
|Accrual of Milestones 2 and 4 Bonus
      Shares (Note 14)       |  | -                      |  |  | -             |  |   | -       |  |   | 4,200       |   |   |               |   |   | -       |  
|Amendment to
      previously issued warrants (Notes 7 and 8e))  |  | -                      |  |  | -             |  |   | -       |  |   | 4,920       |   |   |               |   |   | -       |  
|Issuance of Milestone 2 Bonus Shares
      (Note 14)             |  |                        |  |  | 1,300,000     |  |   | 721     |  |   | (721        | ) |   |               |   |   |         |  
|Stock-based compensation (Note 8c))                              |  | -                      |  |  | -             |  |   | -       |  |   | 1,240       |   |   |               |   |   | -       |  
|Balance  31 January 2010                                        |  | Unlimited              |  |  | 148,980,791   |  | $ | 132,066 |  | $ | 36,979      |   | $ | 71            |   | $ | (71,549 | )
|Loss for the year                                                |  | -                      |  |  | -             |  |   | -       |  |   | -           |   |   |               |   |   | (7,283  | )
|Other comprehensive loss for the
      period                    |  | -                      |  |  | -             |  |   | -       |  |   | -           |   |   | (77           | ) |   | -       |  
|Shares and warrants
      issued:                                |  |                        |  |  |               |  |   |         |  |   |             |   |   |               |   |   |         |  
|Equity
      offering and issuance costs                         |  | -                      |  |  | 5,000,000     |  |   | 9,019   |  |   | 875         |   |   |               |   |   | -       |  
|Exercise
      of options                                        |  | -                      |  |  | 845,000       |  |   | 808     |  |   | -           |   |   |               |   |   | -       |  
|Fair value
      of stock options exercised                      |  | -                      |  |  | -             |  |   | 480     |  |   | (480        | ) |   |               |   |   | -       |  
|Refinancing of convertible
      debt (Note 7)                   |  | -                      |  |  | -             |  |   | -       |  |   | 3,125       |   |   |               |   |   | -       |  
|Milestone 4 Bonus Share cost amortization
      (Note 14)        |  | -                      |  |  | -             |  |   | -       |  |   | (89         | ) |   |               |   |   | -       |  
|Future income tax
      charge (Notes 8e) and 14c))              |  | -                      |  |  | -             |  |   | -       |  |   | (1,390      | ) |   |               |   |   | -       |  
|Stock-based compensation
      (Note 8c))                        |  | -                      |  |  | -             |  |   | -       |  |   | 63          |   |   |               |   |   | -       |  
|Balance  31 January 2011                                        |  | Unlimited              |  |  | 154,825,791   |  | $ | 142,373 |  | $ | 39,083      |   | $ | (6            | ) | $ | (78,832 | )

- See Accompanying Notes -

F-7

---

|PolyMet Mining Corp.                    
|----------------------------------------
|(a development stage company)           
|Consolidated Statements of Cash Flows   
|For the Years Ended 31 January          
|All figures in Thousands of U.S. Dollars

|                                                              |   | 2011    |   |   | 2010             |   |   | 2009    |  
|------------------------------------------------------------- | - | ------- | - | - | ---------------- | - | - | ------- | -
|Operating Activities                                          |   |         |   |   |                  |   |   |         |  
|Loss for the year                                             | $ | (7,283  | ) |   | ****$ **(9,023** | ) | $ | (5,523  | )
|Items not involving cash                                      |   |         |   |   |                  |   |   |         |  
|Amortization                                                  |   | 31      |   |   | 31               |   |   | 31      |  
|Asset retirement
      obligation accretion                   |   | 383     |   |   | 408              |   |   | 443     |  
|Financing costs write-off                                     |   | 1,830   |   |   | -                |   |   | -       |  
|Future income
      tax recovery  (Notes 8e) and 14c))        |   | (1,390  | ) |   | -                |   |   | -       |  
|Investment loss (Note
      13)                               |   | -       |   |   | -                |   |   | 1,365   |  
|Loss on asset
      held for sale (Note 4)                    |   | 520     |   |   | -                |   |   | -       |  
|Loss on refinancing of convertible
      debt (Note 7)        |   | 3,647   |   |   | -                |   |   | -       |  
|Stock-based
      compensation                                |   | (119    | ) |   | 915              |   |   | 487     |  
|Warrant amendment (Notes
      7 and 8e))                     |   | -       |   |   | 4,920            |   |   | 544     |  
|Changes in non-cash working
      capital items               |   |         |   |   |                  |   |   |         |  
|Accounts receivable and advances                              |   | (230    | ) |   | (19              | ) |   | 99      |  
|Prepaid expenses                                              |   | (124    | ) |   | (42              | ) |   | 323     |  
|Accounts payable and accrued
      liabilities                |   | (333    | ) |   | 381              |   |   | (1,059  | )
|Net cash used in operating activities                         |   | (3,068  | ) |   | (2,429           | ) |   | (3,290  | )
|                                                              |   |         |   |   |                  |   |   |         |  
|Financing Activities                                          |   |         |   |   |                  |   |   |         |  
|Share capital - for cash                                      |   | 10,702  |   |   | 25,472           |   |   | 452     |  
|Long-term debt repayment                                      |   | (2,000  | ) |   | (1,250           | ) |   | (1,400  | )
|Convertible debt                                              |   | -       |   |   | 9,944            |   |   | 14,333  |  
|Deferred financing costs                                      |   | (36     | ) |   | (55              | ) |   | (49     | )
|Net cash provided by financing activities                     |   | 8,666   |   |   | 34,111           |   |   | 13,336  |  
|                                                              |   |         |   |   |                  |   |   |         |  
|Investing Activities                                          |   |         |   |   |                  |   |   |         |  
|Purchase of mineral property,
      plant and equipment       |   | (16,519 | ) |   | (17,754          | ) |   | (22,776 | )
|Net cash used in investing activities                         |   | (16,519 | ) |   | (17,754          | ) |   | (22,776 | )
|                                                              |   |         |   |   |                  |   |   |         |  
|Net Increase (Decrease) in Cash and Cash Equivalents Position |   | (10,921 | ) |   | 13,928           |   |   | (12,730 | )
|Cash and Cash Equivalents Position - Beginning
      of Year  |   | 21,282  |   |   | 7,354            |   |   | 20,084  |  
|Cash and Cash Equivalents
      Position - End of Year        | $ | 10,361  |   | $ | **21,282**       |   | $ | 7,354   |  

- See Accompanying Notes -

F-8

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|1. | Nature of Business and Going Concern
|-- | ------------------------------------

PolyMet Mining Corp. (the Company)
  was incorporated in British Columbia, Canada on 4 March 1981 under the name
  Fleck Resources Ltd. The Company changed its name from Fleck Resources to PolyMet
  Mining Corp. on 10 June 1998. The Company is engaged in the exploration and
  development, when warranted, of natural resource properties. The Companys
  primary mineral property is the NorthMet Project, a polymetallic project in
  northeastern Minnesota, USA. The realization of the Companys investment
  in the NorthMet Project and other assets is dependent upon various factors,
  including the existence of economically recoverable mineral reserves, the ability
  to obtain the necessary financing to complete the exploration and development
  of the NorthMet Project, future profitable operations, or alternatively upon
  disposal of the investment on an advantageous basis.

On 25 September 2006, the Company received
  the results of a Definitive Feasibility Study (DFS) prepared by
  Bateman Engineering (Pty) Ltd. (Bateman) that confirms the economic
  and technical viability of the NorthMet Project (the "Project") and, as such,
  the Project has moved from the exploration stage to the development stage.

Going Concern

While these  consolidated financial statements
  have been prepared on the basis that PolyMet Mining Corp. will continue as a
  going concern, which assumes that the Company will be able to meet its commitments,
  continue operations, realize its assets and discharge its liabilities in the
  normal course of business for the foreseeable future, there are conditions that
  cast significant doubt on the validity of that assumption. The Company has incurred
  losses since inception and has an accumulated deficit of $78,832,000 at January
  31, 2011.

PolyMet Mining Corp. will need to raise
  sufficient funds to meet its current obligations as well as fund ongoing development,
  capital expenditures and administration expenses, in accordance with the Companys
  spending plans for the next year. While in the past the Company has been successful
  in closing financing agreements with Glencore, there can be no assurance it
  will be able to do so again in the future.

On 12 November 2010, PolyMet Mining Corp.
  announced that it had entered into a definitive agreement with Glencore AG (Glencore)
  to sell in a private placement 15 million common shares at US$2.00 per share
  for gross proceeds of US$30 million, before deducting estimated offering expenses.
  Completion of the sale of these shares and funding are expected to occur in
  three tranches subject, in each case, to certain closing conditions (Note 7).

In order to meet all of its obligations for the period to 31 January 2012, including paying off the current portion of its long-term debt, PolyMet Mining Corp. will have to successfully receive all of the remaining equity tranches, or obtain alternate financing.  Management is in the latter stage of discussions with Glencore with respect to the budget and believes that agreement will be reached by 30 June 2011, which will enable the Company to access the second and third $10 million tranches of the equity funding in a timely manner that will enable it to meet its obligations.  However, this cannot be assured.

F-9

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|1. | Nature of Business and Going Concern- Continued
|-- | -----------------------------------------------

Management believes that based upon the underlying value of the NorthMet Project,  it will be able to obtain the necessary financing from Glencore or other sources to meet PolyMet Mining Corp.’s requirements on an ongoing basis; however, there can be no assurance that the necessary financing will be obtained. Factors that could affect the availability of financing include the state of international debt and equity markets, investor perceptions and expectations and the global metals markets.

These financial statements do not reflect any adjustments to the carrying values of assets and liabilities, reported expenses, and balance sheet classifications that would be necessary should the Company be unable to continue as a going concern, and these adjustments could be material.

F-10

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|2. | Significant Accounting Policies and Restatements
|-- | ------------------------------------------------

(a) Significant Accounting Policies

The consolidated financial statements
  of PolyMet Mining Corp. have been prepared in accordance with accounting principles
  generally accepted in Canada that require management to make assumptions and
  estimates that affect the reported amounts of assets and liabilities and disclosures
  of contingent assets and liabilities as at the date of the financial statements.

Significant estimates used in the preparation
  of these consolidated financial statements include, amongst other things, expected
  economic lives of plant and equipment, anticipated costs of asset retirement
  obligations including the reclamation of mine site, valuation of options, convertible
  debt and share purchase warrants, and the assessment of impairment in value
  of long lived assets. Actual results could differ from these estimates. Significant
  differences from United States generally accepted accounting principles are
  disclosed in Note 16.

Basis of consolidation

The consolidated financial statements
  include the accounts of the Company and its wholly-owned subsidiary, Poly Met
  Mining, Inc. Inter-company balances and transactions have been eliminated on
  consolidation.

Cash and Cash Equivalents

The Company considers cash and cash equivalents
  to include amounts held in banks and highly liquid debt investments with remaining
  maturities at point of purchase of three months or less.

Mineral Property, Plant and Equipment

Mineral property

Mineral property costs, aside from mineral
  property acquisition costs, incurred prior to determination of the DFS are expensed
  as incurred and expenditures incurred subsequent to the DFS and mineral property
  acquisition costs are deferred or capitalized until the property is placed into
  production, sold, allowed to lapse or abandoned. Acquisition costs include cash,
  debt and fair market value of common shares.

Upon commencement of production, mineral
  properties and acquisition costs relating to mines are amortized over the estimated
  life of the proven and probable mineral reserves to which they relate, calculated
  on a unit of production basis.

As a result of the DFS on the NorthMet
  Project, the Project entered the development stage effective 1 October 2006.
  The Company has deferred mineral property development expenditures related to
  the NorthMet Project from that date.

Ownership in mineral interests involves
  certain inherent risks due to the difficulties of determining the validity of
  certain claims as well as the potential for problems arising from the frequently
  ambiguous conveyance history characteristic of many mineral interests. The Company
  has investigated ownership of its mineral interests and, to the best of its
  knowledge, ownership of its interests are in good standing.

F-11

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|2. | Significant Accounting Policies and Restatements- Continued
|-- | -----------------------------------------------------------

(a) Significant Accounting Policies

Plant and equipment

Plant and equipment are recorded at cost
  and depreciated over the estimated life of the related assets calculated on
  a unit of production or straight-line basis, as appropriate.

Depreciation of plant and equipment is
  provided on a straight-line basis over the estimated economic life of the assets
  as follows:

Leasehold improvements  Straight-line
  over the term of the lease
  Furniture and equipment  Straight-line over 10 years
  Computers  Straight-line over 5 years
  Computer software  Straight-line over 1 year

Mineral property, plant and equipment
  related to the NorthMet Project will begin to be amortized at the time the project
  commences operations.

Assets Held for Sale

Long-Lived assets are classified as held
  for sale in the period in which certain criteria are met. Assets held for sale
  are measured at the lower of carrying amount or fair value less cost to sell
  and are not depreciated as long as they remain classified as held for sale.

Loss Per Share

Loss per share is computed by dividing
  the loss for the year by the weighted average number of common shares outstanding
  during the year. Basic and diluted losses per share are the same for the periods
  reported, as the effect of potential issuances of shares under warrant or share
  option agreements would be anti-dilutive.

Foreign Currency Translation

The United States (U.S.)
  dollar is the functional currency of the Companys business. Accordingly,
  amounts in these consolidated financial statements are expressed in U.S. dollars
  unless otherwise stated. The Companys non-U.S. operations are considered
  to be integrated with the U.S. operations and have been translated into U.S.
  dollars using the temporal method. Under this method, monetary assets and liabilities
  are translated at the rate of exchange in effect at the balance sheet dates
  and non-monetary assets and liabilities are translated at the exchange rate
  in effect at the times of the transactions. Revenue and expense items are translated
  at rates approximating the exchange rate in effect at the time of the transactions,
  except for amortization which is translated at historical rates. Translation
  gains and losses are reflected in the consolidated statement of loss in the
  year incurred.

F-12

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|2. | Significant Accounting Policies and Restatements- Continued
|-- | -----------------------------------------------------------

(a) Significant Accounting Policies-Continued

Stock-Based Compensation and Share
  Purchase Warrants

All stock-based awards made to directors,
  employees and non-employees are measured and recognized using a fair value based
  method. For directors and employees, the fair value of the options is measured
  at the date of the grant. For non-employees, the fair value of the options is
  measured on the earlier of the date at which the counterparty performance is
  complete or the date the performance commitment is reached or the date at which
  the equity instruments are granted if they are fully vested and non-forfeitable.
  For directors, employees and non-employees, the fair value of the options is
  accrued and charged either to operations or mineral property plant and equipment,
  with the offsetting credit to contributed surplus, on a graded method over the
  vesting period. If and when the stock options are ultimately exercised, the
  applicable amounts of contributed surplus are transferred to share capital.

The Company issues share purchase warrants
  in connection with certain equity transactions. The fair value of the warrants,
  as determined using the Black-Scholes option pricing model, is credited to contributed
  surplus. The recorded value of share purchase warrants is transferred to share
  capital upon exercise.

When the Company amends the terms of
  either stock options or share purchase warrants, the incremental change in the
  fair value of the options or warrants due to the amendment is booked to warrant
  amendment expense and contributed surplus.

Asset Retirement Obligations

The Company follows CICA Handbook Section
  3110, Asset Retirement Obligations (CICA 3110) which requires
  the recognition of a legal liability for obligations relating to the retirement
  of property, plant and equipment and obligations arising from the acquisition,
  construction, development, or normal operation of those assets. Such asset retirement
  costs must be recognized at fair value, when a reasonable estimate of fair value
  can be estimated, in the year in which the liability is incurred. A corresponding
  increase to the carrying amount of the related asset, where one is identifiable,
  is recorded and amortized over the life of the asset. Where a related asset
  is not easily identifiable with a liability, the change in fair value over the
  course of the year is expensed. The estimates are based principally on legal
  and regulatory requirements. It is possible that the Companys estimates
  of its ultimate reclamation and closure liabilities could change as a result
  of changes in regulations, changes in the extent of environmental remediation
  required, changes in the means of reclamation or changes in cost estimates.

The operations of the Company may in
  the future be affected from time to time in varying degrees by changes in environmental
  regulations, including those for future removal and site restoration costs.

Both the likelihood of new regulations
  and their overall effect upon the Company may vary greatly and are not predictable.

F-13

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|2. | Significant Accounting Policies and Restatements- Continued
|-- | -----------------------------------------------------------

(a) Significant Accounting Policies-Continued

Impairment of Long-Lived Assets

The Company performs impairment tests
  on its mineral property, plant and equipment when events or changes in circumstances
  indicate that the carrying values of assets may not be recoverable. These tests
  require the comparison of the undiscounted future cash flows to be derived from
  these assets with the carrying value of the assets. If a shortfall exists, the
  assets are written down to fair value, determined primarily using discounted
  cash flow models.

F-14

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|3. | Resource Property Agreements
|-- | ----------------------------

NorthMet, Minnesota, U.S.A. - Lease

Pursuant to an agreement dated 4 January
  1989, subsequently amended and assigned, the Company leases certain lands in
  St. Louis County, Minnesota from RGGS Land & Minerals Ltd., L.P. The original
  term of the renewable lease was 20 years and called for total lease payments
  of $1,475,000. The Company has renewed the lease by making annual payments of
  $150,000 on or before each anniversary through January 2011.

The Company can, at its option, terminate
  the lease at any time by giving written notice to the lessor not less than 90
  days prior to the effective termination date or can indefinitely extend the
  20-year term by continuing to make $150,000 annual lease payments on each successive
  anniversary date.

The lease payments are considered advance
  royalty payments and shall be deducted from future production royalties payable
  to the lessor, which range from 3% to 5% based on the net smelter return received
  by the Company. The Companys recovery of the advance royalty payments
  is subject to the lessor receiving an amount not less than the amount of the
  annual lease payment due for that year.

Pursuant to the leases, PolyMet holds
  mineral rights and the right to mine. PolyMet intends to acquire surface rights
  through a land exchange with the United States Forest Service, which costs have
  been included in the capital cost estimate of the Project.

F-15

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|4. | Mineral Property, Plant and Equipment
|-- | -------------------------------------

Details are as follows:

| |                                                 |   | 31 January |  |   | 31 January | 
| | ----------------------------------------------- | - | ---------- |  | - | ---------- | 
| |                                                 |   | 2011       |  |   | 2010       | 
| |                                                 |   | Net Book   |  |   | Net Book   | 
| | 31 January 2011                                 |   | Value      |  |   | Value      | 
| | Mineral Property Acquisition and Interest Costs | $ | 40,794     |  | $ | 38,613     | 
| | Mine Plan and Development                       |   | 29,305     |  |   | 25,470     | 
| | Environmental                                   |   | 25,994     |  |   | 19,537     | 
| | Consulting and Wages                            |   | 21,756     |  |   | 18,788     | 
| | Operations                                      |   | 9,362      |  |   | 7,641      | 
| | Mine Equipment                                  |   | 949        |  |   | 3,790      | 
| | Asset Retirement Obligation                     |   | 1,865      |  |   | 1,781      | 
| | NorthMet Project                                |   | 130,025    |  |   | 115,620    | 
| | Leasehold improvements                          |   | 7          |  |   | 17         | 
| | Computers                                       |   | 163        |  |   | 142        | 
| | Furniture and equipment                         |   | 36         |  |   | 53         | 
| |                                                 |   | 130,231    |  | $ | 115,832    | 

Erie Plant, Minnesota, U.S.A.

On 15 November 2005, the Company exercised
  an option to acquire 100% ownership of large portions of the former LTV Steel
  Mining Company ore processing plant in north eastern Minnesota under the Asset
  Purchase Agreement with Cliffs Natural Resources Inc. (NYSE:CLF) (Cliffs).

The consideration for the purchase was
  $1 million in cash, $2.4 million in notes payable and the issuance of 6,200,547
  common shares (at fair market value of $7,564,000) in the capital stock of the
  Company. The final instalment of the notes payable was paid on 30 June 2008
  (Note 5).

On 20 December 2006, the Company closed
  a transaction (the Asset Purchase Agreement II) in which it acquired,
  from Cliffs, property and associated rights sufficient to provide it with a
  railroad connection linking the mine development site and the Erie Plant. The
  transaction also included a 120-railcar fleet, locomotive fuelling and maintenance
  facilities, water rights and pipelines, large administrative offices on site
  and an additional 6,000 acres to the east and west of and contiguous to its
  existing tailing facilities.

F-16

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|4. | Mineral Property, Plant and Equipment- Continued
|-- | ------------------------------------------------

The purchase price totalling 2 million
  shares and $15 million in cash and debt was in four tranches:

- 2 million shares of PolyMet, paid at closing;
- $1 million in cash, paid at closing;
- $7 million in cash, payable in quarterly instalments
      of $250,000 commencing 31 December 2006 with the balance payable upon receipt
      of production financing. Interest is payable quarterly starting 31 December
      2006 at the Wall Street JournalPrime Rate, and
- $7 million in cash, payable in quarterly instalments
      of $250,000 commencing on 31 December 2009 with a balloon payment of any
      unpaid balance due on 31 December 2011. No interest was payable until 31
      December 2009 after which it is payable quarterly at the Wall Street
      JournalPrime Rate, accordingly the debt was fair valued, for balance
      sheet purposes, by discounting it at 8.25%.

The Company has assumed certain ongoing
  site-related environmental and reclamation obligations as a result of the above
  purchases. These environmental and reclamation obligations are presently contracted
  under the terms of the purchase agreements with Cliffs. Once the Company obtains
  its permit to mine and Cliffs is released from its obligations by the State
  agencies, the environmental and reclamation obligations will be direct with
  the governing bodies. The present value of the asset retirement obligation in
  the amount of $3,812,000 (Note 6) less accretion of $1,942,000 charged to deficit
  has been recorded as an increase in the carrying amount of the NorthMet Project
  assets and will be amortized over the life of the asset.

Interest and loan accretion on the long-term
  and convertible debt to 31 January 2011 in the amount of $6,770,000 (2010 -
  $4,608,000) has been capitalized as part of the cost of the NorthMet Project
  assets.

As the above assets are not in use no
  amortization of these assets has been recorded to 31 January 2011.

At 31 January 2011 certain equipment
  with a carrying value of approximately $3.42 million was reclassified to assets
  held for sale. In writing this asset down to fair value less cost to sell, the
  Company recorded a loss of $520,000.

F-17

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|5. | Long Term Debt
|-- | --------------

Pursuant to the Asset Purchase Agreements
  (Note 4) the Companys wholly owned subsidiary Poly Met Mining, Inc. (PolyMet
  US) signed three notes payable to Cliffs in the amounts of $2,400,000,
  $7,000,000 and $7,000,000, respectively. The first note was interest bearing
  at the annual simple rate of four percent (4%) and the final payment was made
  in June 2008. The second note is interest bearing at the Wall Street JournalPrime Rate and is being paid in quarterly instalments equal to $250,000
  with the first payment on 31 December 2006, with the balance repayable upon
  receipt of commercial financing, for total repayment of $7,000,000. The third
  note is interest bearing at the Wall Street JournalPrime Rate and is
  being paid in quarterly instalments equal to $250,000 commencing on 31 December
  2009 for total repayment of $7,000,000 with final payment due on December 31,
  2011. No interest was payable on the third note until 31 December 2009. Accordingly
  it was fair valued, for balance sheet purposes, by discounting it at 8.25% .
  If PolyMet were to default on individual elements of the transactions with Cliffs,
  the assets associated with the default could revert to Cliffs control.
  As at 31 January 2011 the outstanding long term debt was as follows:

| |                      |   | 31 January 2011 |   |   | 31 January 2010 |  
| | -------------------- | - | --------------- | - | - | --------------- | -
| |                      |   |                 |   |   |                 |  
| | Notes Payable        | $ | 8,500           |   | $ | 10,499          |  
| | Accrued interest     |   | 25              |   |   | 30              |  
| | Total debt           |   | 8,525           |   |   | 10,529          |  
| | Less current portion |   | (6,750          | ) |   | (2,000          | )
| |                      |   |                 |   |   |                 |  
| | Long term debt       | $ | 1,775           |   | $ | 8,529           |  

F-18

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|6. | Asset Retirement Obligation
|-- | ---------------------------

As part of the consideration for the
  Cliffs Purchase Agreements (Note 4), the Company indemnified Cliffs for the
  liability for final reclamation and closure of the acquired property.

Federal, state and local laws and regulations
  concerning environmental protection affect the Companys operations. Under
  current regulations, the Company is contracted to indemnify Cliffs requirement
  to meet performance standards to minimize environmental impact from operations
  and to perform site restoration and other closure activities. The Companys
  provisions for future site closure and reclamation costs are based on known
  requirements. It is not currently possible to estimate the impact on operating
  results, if any, of future legislative or regulatory developments. The Companys
  estimate of the present value of the obligation to reclaim the NorthMet Project
  is based upon existing reclamation standards at 31 January 2011 and under Canadian
  GAAP. Once the Company obtains its permit to mine the environmental and reclamation
  obligations will be direct with the governing bodies.

The Companys estimate of the fair
  value of the asset retirement obligation at 31 January 2011 was $3,812,000 (2010
  - $3,346,000). These were based upon a 31 January 2011 undiscounted future cost
  of $24.4 million (2010 - $21.6 million) for the first Cliffs transaction and
  $2.1 million (2010 - $2.0 million) for Cliffs II, an annual inflation rate of
  2.00%, credit-adjusted risk free interest rates of 10.00% to 12.00% and a mine
  life of 20 years and a reclamation period of 9 years.

In March 2010, Cliffs entered into a
  consent decree with the Minnesota Pollution Control Agency (MPCA)
  relating to alleged violations on the Cliffs Erie Property. This consent decree
  required submission of Field Study Plan Outlines, which has been approved by
  the MPCA, and Short Term Mitigation Plans, which have not yet been formally approved.
  As part of its prior transactions with Cliffs (Note 4), PolyMet has agreed to
  indemnify Cliffs for certain on-going site environmental liabilities. As such,
  the Company has included its best estimate of the liabilities related to this
  consent decree in its asset retirement obligation for the period ended 31 January
  2011.

Adjustments in the year to January 31, 2011 were as follows:

| |                                                 | Year ended
      January 31, 2011 |  
| | ----------------------------------------------- | --------------------------------- | -
| | Balance - Beginning of period                   | 3,346                             |  
| | Liabilities incurred in the    current period   | -                                 |  
| | Liabilities discharged in    the current period | (457                              | )
| | Accretion expense, and                          | 383                               |  
| | Revisions in estimated cash    flows            | 540                               |  
| | Balance - End of period                         | 3,812                             |  



F-19

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|7. | Glencore Financing
    Details of Fair Value of Glencore debentures, as amended, were as follows:
|-- | -------------------------------------------------------------------------------------------------

| |                                      |  | Year ended |  |  | Year ended |  
| | ------------------------------------ |  | ---------- |  |  | ---------- | -
| |                                      |  | 31 January |  |  | 31 January |  
| |                                      |  | 2011       |  |  | 2010       |  
| | Balance - Beginning of period        |  | 25,253     |  |  | 13,943     |  
| | Issued                               |  | -          |  |  | 10,000     |  
| | Discount                             |  | -          |  |  | (301       | )
| | Fair value adjustment on refinancing |  | 522        |  |  |            |  
| | Financing costs                      |  | -          |  |  | (56        | )
| | Accretion and capitalized interest   |  | 1,858      |  |  | 1,667      |  
| | Balance - End of period              |  | 27,633     |  |  | 25,253     |  

On 31 October 2008, the Company entered
  into a financing with Glencore AG (Glencore) for an aggregate of
  US$50 million floating rate secured debentures due on 30 September 2011 (the
  "Debentures") to be issued by PolyMet US, and guaranteed by the Company. The
  Debentures bear interest at 12-month US dollar LIBOR plus 4%. Interest is payable
  in cash or by increasing the principal amount of the Debentures, at PolyMets
  option, for payments on or before 30 September 2009, and at Glencores
  option thereafter. At 31 January 2011, $2,539,000 of interest had been added
  to the principal amount of the debt since inception. The Debentures are secured
  by all of the assets of PolyMet and PolyMet US, including a pledge of PolyMets
  100% shareholding in PolyMet US.

The Debentures are exchangeable into
  common shares of PolyMet at Glencores option at US$4.00 per share. The
  Issuer can, at its option, prepay the Debentures if PolyMets shares trade
  at a 20-day volume weighted average price equal to or exceeding US$6.00, at
  which time, and at Glencores option, Glencore could exchange the Debentures
  for common shares of PolyMet within 30 days in lieu of payment. Repayment between
  1 October 2009 and 30 September 2010 would have been at 105% of the then outstanding
  principal of the Debentures, repayment between 1 October 2010 and 30 September
  2011 would be at 102.5% of the outstanding principal.

US$7.5 million of the Debentures were
  issued on 31 October 2008, an additional US$7.5 million of the Debentures were
  issued on 22 December 2008, $5 million of the Debentures were issued on 18 June
  2009 and an additional US$5 million of the Debentures were issued on 31 August
  2009.

The final US$25 million of the Debentures,
  to be used primarily for detailed engineering and procurement, were to be issued
  upon publication of the Final Environmental Impact Statement in the State of
  Minnesotas Environmental Quality Board Monitor, receipt by the Company
  of a bona fide term sheet for construction financing and were subject to expenditures
  being in material compliance with budget and other customary conditions as well
  as agreement between Glencore and Cliffs on terms and conditions whereby Cliffs
  will provide its consent to Glencore as mortgagee of those parts of the Erie
  Plant acquired by PolyMet under Asset Agreement II.

On 31 October 2008, PolyMet issued to
  Glencore warrants (Glencore Warrants) to purchase 6.25 million common
  shares of PolyMet at US$5.00 if exercised before the NorthMet Project has produced
  a total of 20,000 metric tonnes of concentrate, or US$6.00 thereafter. The Glencore
  Warrants were to expire on 30 September 2011. If the volume-weighted 20-day
  average price of PolyMets common shares traded at a 50% premium to the
  then applicable exercise price, Glencore would have had to exercise the warrants
  within 30 days or the warrants would have expired.

F-20

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|7. | Glencore Financing -continued
|-- | -----------------------------

The Company has accounted for the initial
  US$7.5 million of the Debentures and the Glencore Warrants by allocating the
  US$7.5 million between the debt, the exchangeable feature of the debt and the
  warrants based on their pro rata fair values. The debt was fair valued using
  the difference between 9% and 12 month LIBOR at 31 October 2008 (3.2075%) plus
  4%. Costs related to the financing of $652,000 have been recorded against the
  convertible debt.

The Company accounted for the second,
  third and fourth advances of US$7.5 million, US$5 million and US$5 million,
  respectively, of the Debentures by allocating the principal amounts between
  the debt and the exchangeable feature of the debt based on their pro rata fair
  values. The debt was fair valued using the difference between 9% and 12 month
  LIBOR at 31 October 2008 (3.2075%) plus 4%. Costs related to the financings
  of $43,000, $16,000 and $12,000, respectively, were recorded against the convertible
  debt.

On 17 November 2009, the Company announced that it agreed to modify certain terms of the above transaction.  Under the new terms the Glencore Warrants entitled Glencore to purchase 6.25 million common shares of PolyMet at US$3.00 at any time on or before 30 September, 2011.  If the 20-day volume weighted average price of PolyMet’s shares had been 150% of the exercise price or more ($4.50), and the Final EIS had been published in the Minnesota Department of Natural Resources EQB Monitor, PolyMet could have accelerated the expiration of the Glencore Warrants to not less than 21 business days after the notice of acceleration.  The incremental $158,000 increase in the fair value of the warrants due to the warrant exchange was debited to warrant amendment expense and credited to contributed surplus.

On 17 November 2009, PolyMet agreed to modify the terms of the final $25 million Tranche E of the $50 million Debenture with Glencore such that Tranche E, if drawn, could be exchanged at US$2.65 per share.  The first four tranches totalling US$25 million (excluding capitalized interest) that had already been drawn would continue to be exchangeable at US$4.00 per share.

On 17 November 2009 PolyMet agreed to to sell 9,433,962 common shares of the Company at US$2.65 per share for gross proceeds of US$25 million.  Closing and funding occurred in two transactions.  On 24 November 2009, the Company closed the first tranche of 3,773,585 common shares at $2.65 per share for gross proceeds of $10 million.  On 26 January 2010, the Company closed the second tranche of 5,660,377 common shares at $2.65 per common share for gross proceeds of $15 million.  Transactions costs for these two financings totaled $499,000.

On 12 November 2010, the Company announced
  that it had renegotiated its debenture financing from Glencore. The agreed amendments
  to the debenture financing are as follows:

- The maturity date of the Tranche A-D Debentures has been extended from 30 September, 2011 to 30 September, 2012.  The Issued Debentures were issued in four tranches between October 2008 and September 2009.  The total initial principal of the Debentures is US$25 million with US$2.539 million of accrued interest as of 31 December 2011.  The Issued Debentures continue to be exchangeable into common shares of PolyMet at US$4.00 per share, as agreed to in 2008.
- Cancellation of Glencores commitment to purchase,
      and the Companys commitment to issue, US$25 million of Tranche E Debentures
      which were to be issued upon publication of the Final Environmental Impact
      Statement, receipt of a term sheet for construction financing, and other
      customary conditions.
- Cancellation of warrants to purchase 6.25 million common shares of PolyMet at US$3.00 at any time until 30 September 2011 issued to Glencore in connection with Debentures.
- Issuance of warrants to purchase 3 million common shares of PolyMet at US$2.00 at any time until 31 December 2015, issued to Glencore in consideration of the amendments listed above.

F-21

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|7. | Glencore Financing -continued
|-- | -----------------------------

On 12 November 2010, the
  Company announced that it had entered into a definitive agreement with Glencore
  to sell in a private placement 15 million common shares at US$2.00 per share
  for gross proceeds of US$30 million, before deducting estimated offering expenses.
  Completion of the sale of these shares and funding are expected to occur in
  the following three tranches subject, in each case, to certain closing conditions:

- Tranche 1 of US$10 million closed on 17 January
      2011;
- Tranche 2 of US$10 million will close on the earlier of (i) the date of the Company’s funding requirement as set forth in the Company’s three year operating budget to be approved by Glencore (the “Budget”), and (ii)  17 October  2011, and
- Tranche 3 of US$10 million will close on the earlier of (i) the date of the Company’s funding requirement as set forth in the Budget, ii) within ten business days following receipt by PolyMet of key permits, in a form reasonably acceptable to Glencore, that will enable the start of construction of the Project, and iii) 15 October 2012.

Glencore has a right of first refusal to provide all material financings, subject to regulatory approval, if it owns 10% or more of the issued and outstanding shares of PolyMet and, if it owns more than 5% of the issued and outstanding shares of PolyMet, Glencore has the right to participate in any equity-related financing to maintain its partially diluted ownership interest (19.6% as of 31 January 2011).

In accordance with both Canadian GAAP and US GAAP, the 12 November 2010 transactions, whereby PolyMet`s existing convertible debt at that date with a book value of $26.730 million was deemed to have been extinguished and reissued, all of the costs associated with the transaction have been recorded as a non-cash expense of $3,647,000, comprising:

- The change in fair value of the conversion feature resulting from its term being extended from 30 September 2011 to 30 September 2012 of $2.533 million;
- The difference in fair value between the warrants to purchase 6.25 million common shares at $3 per share exercisable until 30 September 2011 and the warrants to purchase 3 million common shares at $2 per share exercisable until 31 December 2015 of $3.217 million;
- The amounts of discount and deferred costs remaining to accreted and amortized over the life of the debt of $522,000, less
- The premium of $2.625 million resulting from the price of the common shares to be sold to Glencore compared with the market price at the time of the arrangement.

F-22

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|8. | Share Capital
|-- | -------------

| | a) | Share Issuances for Cash                                                                       
| | -- | -----------------------------------------------------------------------------------------------
| |    |                                                                                                
| |    | During the year ended 31 January 2011 the
        Company issued the following shares for cash:
| |    |                                                                                                
| |    | i)                                                                                             
| |    |                                                                                                
| |    | ii)                                                                                            
| |    |                                                                                                
| |    | During the year ended 31 January 2010 the
        Company issued the following shares for cash:
| |    |                                                                                                
| |    | i)                                                                                             
| |    |                                                                                                
| |    | ii)                                                                                            
| |    |                                                                                                
| |    | iii)                                                                                           

During the year ended 31 January 2009
  the company issued 312,800 shares pursuant to the exercise of stock options
  for total proceeds of $452,000.

F-23

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|8. | Share Capital- Continued
|-- | ------------------------

| | b) | Stock Options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | Effective 25 May 2007, the Company adopted a new Omnibus
        Share Compensation Plan (Stock Option Plan), which was approved
        by the Companys shareholders on 27 June 2007. The Stock Option
        Plan covers the Companys employees, directors, officers and consultants.
        The options are granted for varying terms ranging from two to seven years.
        The maximum number of common shares under the stock option plan shall
        not exceed (i) 10% of the outstanding common shares of the Company at
        the time of granting of the options and (ii) 18,592,888 common shares
        of the Company, of which 3,640,000 common shares are reserved for issuance
        as awards other than options (Note 14a)).
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | Details of stock option activity are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

| |                            |  |            |   |  | Weighted |  |  |            |   |  |            |  
| | -------------------------- |  | ---------- | - |  | -------- |  |  | ---------- | - |  | ---------- | -
| |                            |  |            |   |  | Average  |  |  |            |   |  |            |  
| |                            |  | 31 January |   |  | Exercise |  |  | 31 January |   |  | 31 January |  
| |                            |  | 2011       |   |  | Price    |  |  | 2010       |   |  | 2009       |  
| |                            |  | Options    |   |  | (US$)    |  |  | Options    |   |  | Options    |  
| | Outstanding - Beginning of |  |            |   |  |          |  |  |            |   |  |            |  
| | year                       |  | 13,075,000 |   |  | 2.07     |  |  | 12,615,000 |   |  | 11,312,800 |  
| | Granted                    |  | 300,000    |   |  | 2.17     |  |  | 1,585,000  |   |  | 1,690,000  |  
| | Forfeited                  |  | (900,000   | ) |  | 1.01     |  |  | (350,000   | ) |  | (75,000    | )
| | Exercised                  |  | (845,000   | ) |  | 2.81     |  |  | (775,000   | ) |  | (312,800   | )
| |                            |  |            |   |  |          |  |  |            |   |  |            |  
| | Outstanding - End of year  |  | 11,630,000 |   |  | 2.20     |  |  | 13,075,000 |   |  | 12,615,000 |  

Note: since the exercise price of some
  options is denominated in Canadian funds, the weighted average price denominated
  in US funds changes with changes in the exchange rate.

F-24

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|8. | Share Capital- Continued
|-- | ------------------------

| | b) | Stock Options-Continued                                                                                                                                                                                                                                           
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                   
| |    | At the Annual and Special Meeting of the shareholders
        of PolyMet on 24 June 2009, the disinterested shareholders of the Company
        approved an extension of the expiry date by two years of all stock options
        outstanding as at 24 June 2009.
| |    |                                                                                                                                                                                                                                                                   
| |    | As at 31 January 2011, the following director, officer,
        consultant and employee stock options were outstanding:                                                                                                                                           

| |                                                                               |  |                |  |  |                |  |  |             | 
| | ----------------------------------------------------------------------------- |  | -------------- |  |  | -------------- |  |  | ----------- | 
| |                                                                               |  |                |  |  |                |  |  | Number of   | 
| |                                                                               |  | Exercise Price |  |  | Exercise Price |  |  | options     | 
| | Expiry Date                                                                   |  | (US$)          |  |  | (CDN$)         |  |  | outstanding | 
| | 5 July 2011                                                                   |  | 0.66           |  |  | 0.66           |  |  | 800,000     | 
| | 18 October 2011                                                               |  | 0.79           |  |  | 0.79           |  |  | 50,000      | 
| | 30 March 2012                                                                 |  | 0.65           |  |  | 0.65           |  |  | 85,000      | 
| | 1 May 2012                                                                    |  | 0.85           |  |  | 0.85           |  |  | 350,000     | 
| | 15 June 2012                                                                  |  | 0.94           |  |  | 0.94           |  |  | 40,000      | 
| | 19 September 2012                                                             |  | 1.36           |  |  | 1.36           |  |  | 1,240,000   | 
| | 24 October 2012                                                               |  | 1.20           |  |  | 1.20           |  |  | 200,000     | 
| | 5 December 2012                                                               |  | 1.15           |  |  | 1.15           |  |  | 200,000     | 
| | 20 March 2013                                                                 |  | 2.76           |  |  | 2.76           |  |  | 2,400,000   | 
| | 19 June 2013                                                                  |  | 2.97           |  |  | 2.97           |  |  | 325,000     | 
| | 1 September 2013                                                              |  | 3.82           |  |  | 3.82           |  |  | 300,000     | 
| | 22 September 2013                                                             |  | 3.51           |  |  | 3.51           |  |  | 75,000      | 
| | 5 January 2014                                                                |  | 3.30           |  |  | 3.30           |  |  | 525,000     | 
| | 13 February 2014                                                              |  | 2.99           |  |  | 2.99           |  |  | 1,250,000   | 
| | 12 March 2014                                                                 |  | 2.92           |  |  | 2.92           |  |  | 250,000     | 
| | 23 March 2014                                                                 |  | 2.89           |  |  | 2.89           |  |  | 50,000      | 
| | 4 September 2014                                                              |  | 3.00           |  |  | 3.00           |  |  | 360,000     | 
| | 12 December 2014                                                              |  | 3.05           |  |  | 3.05           |  |  | 205,000     | 
| | 11 January 2015                                                               |  | 3.03           |  |  | 3.03           |  |  | 70,000      | 
| | 31 January 2015                                                               |  | 2.87           |  |  | 2.87           |  |  | 100,000     | 
| | 15 February 2015                                                              |  | 2.72           |  |  | 2.72           |  |  | 500,000     | 
| | 2 June 2015                                                                   |  | 3.92           |  |  | 3.92           |  |  | 100,000     | 
| | 30 July 2015                                                                  |  | 3.22           |  |  | 3.22           |  |  | 175,000     | 
| | 30 January 2016                                                               |  | 0.82           |  |  | 0.82           |  |  | 595,000     | 
| | 17 February 2016                                                              |  | 0.82           |  |  | 0.82           |  |  | 910,000     | 
| | 15 October 2016                                                               |  | 2.67           |  |  | 2.67           |  |  | 115,000     | 
| | 8 January 2017                                                                |  | 3.54           |  |  | 3.54           |  |  | 60,000      | 
| | 25
      January 2018                                                         |  | 2.17           |  |  | 2.17           |  |  | 300,000     | 
| | Weighted average
      exercise price and total number of options outstanding |  | 2.20           |  |  | 2.20           |  |  | 11,630,000  | 

As at 31 January 2011 all options had
  vested and were exercisable, with the exception of 1,722,500 which vest upon
  completion of specific targets.

F-25

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|8. | Share Capital- Continued
|-- | ------------------------

| | b) | Stock Options-Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | Subsequent to year end, on 10 March 2011, the Company
        granted 750,000 options to certain independent directors with an average
        exercise price of USD$2.04 per option. Also subsequent to year end, bonuses
        comprising 327,500 restricted stock for US employees and consultants and
        restricted stock units for Canadian employees and consultants were approved
        by the Board of Directors. 50% of each award to be issued upon receipt
        of permits and the balance to be issued upon the start of production.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | c) | Stock-Based Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | During the year ended 31 January 2011, the Company granted
        300,000 options to directors, officers, consultants and employees with
        an average exercise price of USD$2.20 per option. The fair value of these
        options was estimated at the date of grant using the Black-Scholes Option
        Pricing Model with the following weighted average assumptions:                                                                                                                                                                        

| | Risk-free interest rate             | 1.68% 
| | ----------------------------------- | ------
| | Expected dividend yield             | Nil   
| | Expected stock price volatility     | 64.79%
| | Expected option life
      in years | 1.50  

The weighted fair value of options granted
  during the period was US$0.73. Option pricing models require the input of highly
  subjective assumptions including the estimate of the share price volatility.
  Changes in the subjective input assumptions can materially affect the fair value
  estimate, and therefore, the existing models do not necessarily provide a reliable
  single measure of the fair value of the Companys stock options.

During the year ended 31 January 2011,
  the Company recorded $275,000 for stock based compensation in its accounts as
  an expense of $93,000 and a debit to mineral property, plant and equipment of
  $182,000, with the offsetting entries going to contributed surplus. During the
  year ended 31 January 2011, the Company also recorded a debit to contributed
  surplus and a credit to stock based compensation expense of $212,000 to reverse
  prior accounting for stock options which had yet to vest and were forfeited
  in the period.

F-26

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|8. | Share Capital- Continued
|-- | ------------------------

| | c) | Stock Based Compensation-Continued                                                                                                                                                                                                                                                                                                                                                    
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                       
| |    | During the year ended 31 January 2010, the Company granted
        1,585,000 options to directors, officers, consultants and employees with
        an average exercise price of USD$1.14 per option. The fair value of these
        options was estimated at the date of grant using the Black-Scholes Option
        Pricing Model with the following weighted average assumptions:

| | Risk-free interest rate             | 1.30% to 1.69%   
| | ----------------------------------- | -----------------
| | Expected dividend yield             | Nil              
| | Expected stock price volatility     | 81.97% to 107.32%
| | Expected option life
      in years | 2.33             

The weighted fair value of options granted
  during the period was US$0.56. Option pricing models require the input of highly
  subjective assumptions including the estimate of the share price volatility.
  Changes in the subjective input assumptions can materially affect the fair value
  estimate, and therefore, the existing models do not necessarily provide a reliable
  single measure of the fair value of the Companys stock options.

During the year ended 31 January 2010,
  the Company recorded $1,240,000 for stock based compensation in its accounts
  as an expense of $915,000 and a debit to mineral property, plant and equipment
  of $325,000, with the offsetting entries going to contributed surplus. The total
  for the year included the amortization of the fair value cost of existing stock
  options and the impact of the two year extension of the term of all options
  outstanding at 24 June 2009 ($339,000).

During the year ended 31 January 2009,
  the Company granted 1,690,000 options to directors, officers, consultants and
  employees with an average exercise price of USD$1.81 per option. The fair value
  of these options was estimated at the date of grant using the Black-Scholes
  Option Pricing Model with the following weighted average assumptions:

| | Risk-free interest rate             | 1.54% to 3.23%  
| | ----------------------------------- | ----------------
| | Expected dividend yield             | Nil             
| | Expected stock price volatility     | 56.52% to 83.90%
| | Expected option life
      in years | 2.33            

The weighted fair value of options granted
  during the period was US$0.79. During the year ended 31 January 2009, the Company
  recorded $1,822,000 for stock based compensation in its accounts as an expense
  of $487,000 and a debit to mineral property, plant and equipment of $1,335,000,
  with the offsetting entries going to contributed surplus.

F-27

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|8. | Share Capital- Continued
|-- | ------------------------

| | d) | Contributed Surplus                                                                                                                                                                    
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                        
| |    | Contributed surplus represents accumulated stock-based
        compensation expense and warrants issued, reduced by the fair value of
        the stock options and warrants exercised.
| |    |                                                                                                                                                                                        
| |    | Details are as follows:                                                                                                                                                                

| |                                                                          |   | 31 January |   |   | 31 January |  
| | ------------------------------------------------------------------------ | - | ---------- | - | - | ---------- | -
| |                                                                          |   | 2011       |   |   | 2010       |  
| | Balance  Beginning of year                                              | $ | 36,979     |   | $ | 27,549     |  
| | Current year fair value of stock-based compensation                      |   | 63         |   |   | 1,240      |  
| | Fair value of exchangeable warrants and
      debt conversion (Note 7)   |   | -          |   |   | 352        |  
| | Change in fair value of warrants amended (Notes 7, 8a)and 8 e))          |   | -          |   |   | 4,920      |  
| | Issuance of Milestone 2 Bonus Shares (Note 14 a))                        |   | -          |   |   | (721       | )
| | Refinancing of convertible debt (Note 7)                                 |   | 3,125      |   |   | -          |  
| | Premium on equity financing                                              |   | 875        |   |   | -          |  
| | Bonus Shares for Milestones 2 and 4 cost amortization (Note 14a))        |   | 1,593      |   |   | 4,200      |  
| | Forfeiture of Bonus Shares for Milestone 4 (Note 14a))                   |   | (1,682     | ) |   | -          |  
| | Future income tax charge (Notes 8e) and
      14c))                      |   | (1,390     | ) |   | -          |  
| | Fair value of stock options and warrants exercised during
      the year |   | (480       | ) |   | (561       | )
| | Balance  End of
      year                                              | $ | 39,083     |   | $ | 36,979     |  

F-28

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|8. | Share Capital- Continued
|-- | ------------------------

| | e) | Share Purchase Warrants
    Details of stock purchase warrant activity are as follows:
| | -- | --------------------------------------------------------------------------------------

| |                                            |  | 31 January 2011 |   |  | 31 January 2010 | 
| | ------------------------------------------ |  | --------------- | - |  | --------------- | 
| |                                            |  |                 |   |  | Weighted        | 
| |                                            |  |                 |   |  | Average         | 
| |                                            |  |                 |   |  | Exercise        | 
| |                                            |  | Warrants        |   |  | Price           | 
| |                                            |  |                 |   |  | (US$)           | 
| | Warrants outstanding - beginning of period |  | 15,202,046      |   |  | 3.74            | 
| | Expired (Note 8e))                         |  | (4,942,046      | ) |  | 3.23            | 
| | Cancelled (Note 7)                         |  | (6,250,000      | ) |  | 3.00            | 
| | Exercised                                  |  | -               |   |  | -               | 
| | Issued                                     |  | -               |   |  | -               | 
| | Issued (Note 7)                            |  | 3,000,000       |   |  | 2.00            | 
| |                                            |  |                 |   |  |                 | 
| | Warrants
      outstanding  end of period |  | 7,010,000       |   |  | 4.00            | 

F-29

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|8. | Share Capital- Continued
|-- | ------------------------

| | e) | Share Purchase Warrants Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | On 17 April 2007, the Company issued 7,500,000
        warrants in connection with a non-brokered private placement financing
        of 15 million units at US$2.75 per unit, with each unit comprising one
        common share and one-half of one warrant. Each whole warrant was exercisable
        into a common share at a price of US$4.00 at any time until 13 October
        2008 subject to an early trigger if the 20- day volume weighted average
        price of the common shares is US$6.00 or more. In connection with the
        private placement, the Company has paid finders fees including an
        additional 520,000 broker warrants having the same terms as the warrants
        described above.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | On 10 October 2008, the Company announced
        that it had received the consent from the holders of more than two-thirds
        of the 8,020,000 warrants issued as part of the April 2007 private placement
        to exchange those warrants into:                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | The incremental $544,000 increase in the fair
        value of the warrants due to the warrant exchange was debited to warrant
        amendment expense and credited to contributed surplus in the year ended
        31 January 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | In October 2009, the Company received the consent from holders of more than two-thirds of the above warrants to exchange the 4,010,000 warrants due to expire on 13 October, 2009 for 4,010,000 warrants, each warrant entitling the holder to purchase one share of PolyMet common stock at US$3.00 per share at any time until the sooner of 30 calendar days after publication of the draft Environmental Impact Statement by the State of Minnesota in the state’s Environmental Quality Board Monitor and 31 December, 2009.  The incremental $1,005,000 increase in the fair value of the warrants due to the warrant exchange was debited to warrant amendment expense and credited to contributed surplus.                 

F-30

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|8. | Share Capital- Continued
|-- | ------------------------

| | e) | Share Purchase Warrants Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | In November 2009, the Company received the consent from
        holders of more than two-thirds of the above warrants to exchange the
        4,010,000 warrants due to expire the earlier of 30 calendar days after
        publication of the draft Environmental Impact Statement by the State of
        Minnesota in the states Environmental Quality Board Monitor and
        31 December, 2009 for 4,010,000 warrants, each warrant entitling the holder
        to purchase one share of PolyMet common stock at US$3.00 per share at
        any time until the sooner of 21 business days after publication of the
        final Environmental Impact Statement by the State of Minnesota in the
        states Environmental Quality Board Monitor and 31 December 2010.
        The incremental $3,757,000 increase in the fair value of the warrants
        due to the warrant exchange was debited to warrant amendment expense and
        credited to contributed surplus.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | Warrants to purchase 167,954 shares of PolyMet common stock had been exercised in the year ended 31 January 2010.  On 31 December 2010, the unexercised warrants, to purchase 3,842,046 shares of PolyMet common stock at $3.00 per share, expired.  The Company recorded a future income tax charge as the expiration of the warrants triggered a capital gain for tax purposes which was offset by the application of tax losses carried forward resulting in a credit of $1,219,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | On 31 October 2008, the Company issued 6,250,000 warrants ("Purchase Warrants") to Glencore as partial consideration under the financing agreement described in Note 7.  The warrants entitled Glencore to purchase 6.25 million common shares of PolyMet at US$5.00 if exercised before the NorthMet project has produced a total of 20,000 metric tonnes of concentrate, or US$6.00 thereafter.  The warrants would have expired on 30 September, 2011.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | On 17 November 2009, the Company amended the terms such that the Purchase Warrants entitled Glencore to purchase 6,250,000 common shares of PolyMet at US$3.00 and expire on 30 September, 2011.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | On 12 November 2010, the Company cancelled warrants giving Glencore the right to purchase 6,250,000 common shares of PolyMet at US$3.00 at any time until 30 September, 2011 and issued warrants giving Glencore the right to purchase 3,000,000 common shares of PolyMet at US$2.00 at any time until 31 December, 2015, in consideration of the amendments to the debenture agreements (Note 7).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

F-31

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|8. | Share Capital -continued
|-- | ------------------------
|   |                         
|   | e)                      
|   |                         
|   |                         
|   |                         
|   |                         
|   |                         
|   |                         
|   |                         
|   | f)                      
|   |                         
|   |                         
|   |                         
|   |                         

F-32

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|9. | Supplemental Disclosure With Respect To Statements
        of Cash Flows
|-- | ------------------------------------------------------------------------

During the years ended 31 January 2011,
  2010 and 2009 the Company entered into the following non-cash investing and
  financing activities:

| |                                                                                           |   | 2011 |  |   | 2010 |  |   | 2009  | 
| | ----------------------------------------------------------------------------------------- | - | ---- |  | - | ---- |  | - | ----- | 
| | Changes in accounts payable and accrued liabilities related to
      Investing Activities | $ | 176  |  | $ | 225  |  | $ | 1,970 | 

|10. | Related Party Transactions                                                                                                                                           
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                      
|    | The Company has conducted transactions with officers,
        directors and persons or companies related to directors and paid or accrued
        amounts as follows:

| |                                                                           |   | 2011 |  |   | 2010 |  |   | 2009 | 
| | ------------------------------------------------------------------------- | - | ---- |  | - | ---- |  | - | ---- | 
| |                                                                           |   |      |  |   |      |  |   |      | 
| | Consulting fees paid to David Dreisinger, a
      Director of the Company | $ | 59   |  | $ | 59   |  | $ | 56   | 
| |                                                                           | $ | 59   |  | $ | 59   |  | $ | 56   | 

The amounts charged to the Company for
  the services provided have been determined by negotiation among the parties.
  These transactions were in the normal course of operations and were measured
  at the exchange value, which is the amount of consideration established and
  agreed to by the related party.

During the year ended 31 January 2011,
  the Company paid $59,000 (2010 - $59,000 and 2009 - $56,000) to Dr. Dreisinger
  for consulting fees primarily in connection with activities related to the processing
  / technical side of the NorthMet project and related expenses (the latter were
  supported by invoices and receipts). The consulting fees were based on a monthly
  fee of Canadian $5,500 plus general sales tax. Throughout the term of his engagement,
  Dr. Dreisinger has conducted in-person and telephonic meetings with Mr. William
  Murray, formerly the Companys Executive Chairman and, before that, its
  President and Chief Executive Officer, and other members of management at which
  he provided both verbal and written updates on the status of test work and made
  recommendations for future activities. These meetings occurred approximately
  every two to three weeks for the past six years.

The agreement with Dr. Dreisinger was
  entered into at a time when the Companys current business plans were being
  formulated and were month to month and oral in nature. The agreement was approved
  by Mr. William Murray. It was discussed with the Companys board of directors
  who did not consider that a formal approval and written contract was necessary
  at that time. The Company believes that the contract was at terms at least as
  good as could be obtained from third parties.

F-33

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|11. | Income Taxes                                                                                                                                                                                                                                              
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                           
|    | The Companys provision for income taxes differs
        from the amounts computed by applying the combined Canadian federal and
        provincial income tax rates (2011  28.5% and 2010  28.5%)
        to the net loss as a result of the following:

| |                                                    |   | 2011   |   |   | 2010       |      
| | -------------------------------------------------- | - | ------ | - | - | ---------- | -----
| | Provision for recovery of taxes at statutory rates | $ | (2,075 | ) | $ | **(2,583** | **)**
| | Differences in foreign tax rates                   |   | (320   | ) |   | (85        | )    
| | Non-deductible loss on refinancing with Glencore   |   | 1,039  |   |   | -          |      
| | Non-deductible loss on warrant amendments          |   | -      |   |   | 1,476      |      
| | Other non-deductible items and other               |   | 2,545  |   |   | (1,691     | )    
| | Change in valuation allowance                      |   | (2,579 | ) |   | 2,883      |      
| | Income tax (recovery)/charge                       | $ | (1,390 | ) | $ | **-**      |      

Future income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company's future tax assets as at 31 January 2011 are as follows:

| |                                 |   | 2011    |   |   | 2010       |  
| | ------------------------------- | - | ------- | - | - | ---------- | -
| | Non-capital loss carry forwards | $ | 16,278  |   | $ | **14,573** |  
| | Unutilized exploration expenses |   | (3,556  | ) |   | 730        |  
| | Capital assets                  |   | 112     |   |   | 109        |  
| | Total future income taxes       |   | 12,834  |   |   | 15,412     |  
| | Less: valuation allowance       |   | (12,834 | ) |   | (15,412    | )
| |                                 |   |         |   |   |            |  
| | Net future income tax assets    | $ | -       |   | $ | -          |  

The Company has income tax loss carry forwards of approximately $4.1 million in Canada, which may be used to reduce future income taxes otherwise payable and which expire in the years 2015 and 2026.

The Company has income tax loss carry forwards of approximately $40.1 million in the United States, which may be used to reduce future income taxes otherwise payable and which expire in the years 2019 to 2031.  Virtually all of the unutilized exploration expenses are in the United States.

The tax benefit of the above noted tax
  assets have been offset by recognition of a valuation allowance in these financial
  statements.

F-34

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|12. | Segmented Information
|--- | ---------------------

The Company is in the permitting stage
  of developing its mineral properties in the U.S. and provides for its financing
  and administrative functions at the head office located in Canada. Segmented
  information on a geographic basis is as follows:

| |                        |   |        |  |   |         |  |   |              | 
| | ---------------------- | - | ------ |  | - | ------- |  | - | ------------ | 
| | 2011                   |   | Canada |  |   | U.S.    |  |   | Consolidated | 
| | Segment operating loss | $ | 5,747  |  | $ | 1,536   |  | $ | 7,283        | 
| | Identifiable assets    | $ | 10,362 |  | $ | 134,670 |  | $ | 145,032      | 
| |                        |   |        |  |   |         |  |   |              | 
| | 2010                   |   |        |  |   |         |  |   |              | 
| | Segment operating loss | $ | 8,131  |  | $ | 892     |  | $ | 9,023        | 
| | Identifiable assets    | $ | 21,391 |  | $ | 118,257 |  | $ | 139,648      | 
| |                        |   |        |  |   |         |  |   |              | 
| | 2009                   |   |        |  |   |         |  |   |              | 
| | Segment operating loss | $ | 4,963  |  | $ | 560     |  | $ | 5,523        | 
| | Identifiable assets    | $ | 7,221  |  | $ | 94,378  |  | $ | 101,599      | 

|13. | Investment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | During the quarter ended 31 July 2007, the Company acquired,
        for cash, common shares of a publicly traded Canadian mining company whose
        primary business is the operation of a recommissioned base metal mine.
        This investment represents less than 5% of the public mining companys
        outstanding common shares and was designated as available-for-sale and,
        as such, had been marked-to-market with the change in the fair value of
        the investment from acquisition to quarterly financial statements being
        recorded in Other Comprehensive Loss.                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | As at 31 January 2008, the Company determined that the
        investment has had an other than temporary decline in value. This determination
        was based on, among other factors, a significant drop in market price
        for the investment companys main product and a continued decline
        in the share price of the investment company. The initial acquisition
        cost of the investment was US$2,495,000 (C$2,618,000) and the fair value
        of the investment at 31 January 2008 was US$1,445,000 (C$1,440,000). As
        a result, the Company recorded an investment loss of $1,050,000 in its
        income statement and reversed the amounts that had previously been recorded
        in Other Comprehensive Loss during the year.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | As at 31 January 2009, the Company determined that the
        investment has had an additional other than temporary decline in value.
        This determination was based on, among other factors, a continued drop
        in market price for the investment companys main product and a continued
        decline in the share price of the investment company. The fair value of
        the investment at 31 January 2009 was US$57,000. During the year, the
        Company recorded an additional investment losses totalling $1,365,000 due
        to declines in value.                                                                                                                                                                                        

F-35

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|14. | Contingent Liabilities and Commitments
|--- | --------------------------------------
|    |                                       
|    | a)                                    
|    |                                       
|    |                                       

Bonus SharesMilestone 1
      1,590,000
      issuedMilestone 2
      1,300,000
      (i) issued in May 2009Milestone 3
      2,350,000
      issuedMilestone 4
      3,640,000
      (ii)
        and (iii)


| | (i)   | Milestone 2  Negotiation and completion of an
        off-take agreement with a senior metals producer for the purchase of nickel-hydroxide
        produced from the NorthMet Project, and / or an equity investment in the
        Company by such a producer or producers. The bonus shares allocated to
        Milestone 2 are valued at C$0.75. This milestone was deemed to have been
        achieved in May 2009 and therefore the Company issued the shares to certain
        directors and insiders and capitalized $714,000 to property plant and
        equipment.                                                                                                                                                                                                                                                                                         
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (ii)  | Milestone 4 – Commencement of commercial production at the NorthMet Project at a time when the Company has not less than 50% ownership.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (iii) | At the Annual General Meeting of shareholders of the Company, held on 17 June 2008, the disinterested shareholders approved the bonus shares for Milestone 4.  The bonus shares allocated to Milestone 4 are valued at US$3.80, the Company’s closing trading price on 17 June 2008.
      During the year ended 31 January 2011, the Company recorded a negative $89,000 related to Milestone 4 (2010 – positive $3,843,000; 2009 – positive $3,583,000), these amounts were capitalized to Mineral Property, Plant and Equipment.  The current year reversal includes $1,682,000 representing the forfeiture of entitlement to bonus shares by individuals upon resignation or not continuing to stand as Directors of the Company.
      The fair value of these unissued bonus shares is being amortized, over its expected life, until the estimated date of issuance.

F-36

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|14. | Contingent Liabilities and Commitments- Continued
|--- | -------------------------------------------------

| | b) | Pursuant to the Companys Asset Purchase Agreement
        with Cliffs (Note 4), for as long as Cliffs owns 1% or more of the Companys
        issued shares, Cliffs will have the right to participate on a pro-rata
        basis in future cash equity financings. This agreement also includes a
        first right of refusal in favour of the Company should Cliffs wish to
        dispose of its interest.                                                                                                                                                                                                                                                                                                                                                               
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | c) | On 31 October 2006 the Company entered into an agreement
        with BNP Paribas Loan Services (BNPP) whereby BNPP advised
        and assisted PolyMet in all aspects of preparation for construction finance.
        As part of this agreement, BNPP was issued warrants to purchase 600,000
        shares of the Companys common stock at a price of US$4.00 per share
        at any time prior to 30 October 2010. The fair value of these warrants
        was $1,197,000. Further, upon delivering a bona fide offer of project
        financing, warrants to purchase an additional 500,000 shares of the Company
        at a price of US$4.00 per share at any time prior to 30 October 2010 would
        have vested. These warrants expired on 30 October 2010.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | The Company decided to review alternatives for construction financing and decided not to renew its current agreement with BNPP which expired on 31 July 2010.  As such, the $1,830,000, of which $1,197,000 was non-cash related to the fair value of warrants issued, recorded as a deferred financing cost asset has been written off to the consolidated statement of loss in the second quarter of this year.  On 30 October, 2010 the warrants expired.  As such, PolyMet recorded a future income tax charge of $171,000 to contributed surplus, which was offset on income tax recover by the application of tax losses carried forward.                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | d) | On 13 October 2008, the Company entered into a collateral
        pledge agreement wherein it pledged a used drill rig which it owned against
        amounts due to a supplier for rebuilding the drill rig. The drill rig
        has a book value of $3,420,000 and, as at 31 January 2011, the Company
        is paying the supplier $1,115,000 over time for work on the drill.                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | e) | On 31 October 2008, the Company entered into agreements
        with Glencore wherein Glencore will provide marketing services covering
        concentrates, metal, or intermediate products at prevailing market terms
        for at least the first five years of production.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | f) | On 31 January 2011, the Company had outstanding commitments
        related to equipment, rent, consultants and the environmental review process
        of approximately $1,300,000 predominantly due over the next year. Subsequent
        to 31 January 2011, PolyMet entered into an agreement with the State of
        Minnesotas Department of Natural Resources committing it to an additional
        $2,818,000 through 1 April 2012 with respect to the Supplemental Draft
        Environmental Impact Study.                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | g) | At 31 January 2011 the Company had non-binding commitments in 2011 and 2012 of $1.106 million to pay options to maintain its right to acquire certain lands that it will need at permitting.  These lands include land that the Company expects to exchange with the USFS for surface rights at the mine site and land for wetland credits.                                                                                                                                                                                                                                                                                                                                                                                                                                        

F-37

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|15. | Financial Instruments and Risk Management                                                                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                          
|    | Categories of financial assets and liabilities                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                          
|    | Under Canadian GAAP, financial instruments are classified
        into one of the following five categories: held-for-trading; held to maturity
        investment; loans and receivables; available-for-sale financial assets,
        and other financial liabilities. The carrying values of the Companys
        financial instruments are classified into the following categories:

| |                                       |   | 31 January |  |   | 31 January | 
| | ------------------------------------- | - | ---------- |  | - | ---------- | 
| |                                       |   | 2011       |  |   | 2010       | 
| | Held-for-trading (1)                  | $ | 10,361     |  | $ | 21,282     | 
| | Available-for-sale                    |   | 66         |  |   | 140        | 
| | Loans and receivables                 |   | 318        |  |   | 88         | 
| | Other financial liabilities
      (2) |   | 38,602     |  |   | 38,735     | 

| | (1) | Includes cash and equivalents.                                                                 
| | --- | -----------------------------------------------------------------------------------------------
| | (2) | Includes accounts payable and accrued liabilities, convertible
        debt and long-term debt.

The Company has determined the estimated
  fair values of its financial instruments based on appropriate valuation methodologies.

Risks arising from financial instruments
  and risk management

The Companys activities expose
  it to a variety of financial risks: market risk (including foreign exchange),
  credit risk, liquidity risk, interest rate risk and investment risk. Reflecting
  the current stage of development of the Companys NorthMet Project, PolyMets
  overall risk management program focuses on facilitating the Companys ability
  to continue as a going concern and seeks to minimize potential adverse effects
  on PolyMets ability to execute its business plan.

Risk management is the responsibility
  of executive management. Material risks are identified and monitored and are
  discussed with the audit committee and the board of directors.

Foreign exchange risk

The Company incurs expenditures in Canada
  and in the United States. The functional and reporting currency of the Company
  is the United States dollar. Foreign exchange risk arises because the amount
  of Canadian dollar cash and equivalents, receivables, investment or payables
  will vary in United States dollar terms due to changes in exchange rates.

As the majority of the Companys
  expenditures are in United States dollars, the Company has kept a significant
  portion of its cash and equivalents in United States dollars. The Company has
  not hedged its exposure to currency fluctuations.

F-38

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|15. | Financial Instruments and Risk Management-
        continued
|--- | ------------------------------------------------------------

As at 31 January 2011, the Company is
  exposed to currency risk through the following assets and liabilities denominated
  in Canadian dollars:

| |                                 |   | 31 January |   |   | 31 January |  
| | ------------------------------- | - | ---------- | - | - | ---------- | -
| |                                 |   | 2011       |   |   | 2010       |  
| | Held-for-trading (1)            | $ | 554        |   | $ | 157        |  
| | Available-for-sale              |   | 66         |   |   | 140        |  
| | Loans and receivables           |   | 102        |   |   | 25         |  
| | Other financial liabilities (2) |   | (192       | ) |   | (302       | )
| |                                 |   |            |   |   |            |  
| |                                 | $ | 530        |   | $ | 20         |  

| | (1) | Includes cash and equivalents.                    
| | --- | --------------------------------------------------
| | (2) | Includes accounts payable and accrued liabilities.

Based on the above net exposures, as
  at 31 January 2011, a 10% change in the Canadian / United States exchange rate
  would impact the Companys loss by $53,000.

Credit risk

Credit risk arises on cash and equivalents
  held with banks and financial institutions, as well as credit exposure on outstanding
  accounts receivable. The maximum exposure to credit risk is equal to the carrying
  value of the financial assets of $10,679,000.

The Companys cash and equivalents
  are held through a large Canadian financial institution.

Liquidity risk

Liquidity risk arises through the excess
  of financial obligations over available financial assets due at any point in
  time. The Companys objective in managing liquidity risk is to maintain
  sufficient readily available reserves in order to meet its liquidity requirements
  at any point in time. The Company achieves this by maintaining sufficient cash
  and equivalents. Additional information relating to liquidity risk and going
  concern is disclosed in Note 1.

Interest rate risk

Interest rate risk arises on cash and
  equivalents and long-term debt and fluctuations in the related interest rates.
  The Company has not hedged any of its interest rate risk.

As at 31 January 2011, the Company is
  exposed to interest rate risk through the following assets and liabilities:

| |                                       |   | 31 January |  |   | 31 January | 
| | ------------------------------------- | - | ---------- |  | - | ---------- | 
| |                                       |   | 2011       |  |   | 2010       | 
| | Held-for-trading (1)                  | $ | 10,361     |  | $ | 21,282     | 
| | Other financial liabilities
      (2) |   | 36,158     |  |   | 35,782     | 

| | (1) | Includes cash and equivalents.                                           
| | --- | -------------------------------------------------------------------------
| | (2) | Represents long-term debt (Note 5) and convertible debt
        (Note 7).

F-39

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|15. | Financial Instruments and Risk Management- continued
|--- | ----------------------------------------------------

Investment risk

The Companys investment in the
  common shares of a publicly traded Canadian mining company bears investment
  risk. The maximum exposure to investment risk is equal to the carrying value
  of the investment.

The Company's investment in the Project
  (Note 4) is also at risk since the Project is pledged in part as security to
  Cliffs and otherwise is pledged wholly as security to Glencore.

As at 31 January 2011, the Company is
  exposed to investment risk through the following assets:

| |                        |       | **31** **January** |  |   | 31 January | 
| | ---------------------- | ----- | ------------------ |  | - | ---------- | 
| |                        |       | 2011               |  |   | 2010       | 
| | Available-for-sale (1) | **$** | **66**             |  | $ | 140        | 

| | (1) | Includes investment.
| | --- | --------------------

Fair Value Measurements

PolyMets financial assets and liabilities
  are measured or disclosed at fair value on a recurring basis and classified
  in their entirety based on the lowest level of input that is significant to
  the fair value measurement. There are three levels of fair value hierarchy that
  prioritize the inputs to valuation techniques used to measure fair value, with
  level 1 inputs having the highest priority. The levels and the valuation techniques
  used to value the Companys financial assets and liabilities are described
  below:

| | Level 1  | Unadjusted quoted prices in active
        markets that are accessible at the measurement date for identical, unrestricted
        assets or liabilities.                                                                                                        
| | --------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |           |                                                                                                                                                                                                                                                                  
| |           | Investments in marketable securities
        are valued using quoted market prices in active markets, obtained from
        securities exchanges. Accordingly, these items are included in Level 1
        of the fair value hierarchy.                          
| |           |                                                                                                                                                                                                                                                                  
| | Level 2  | Quoted prices in markets that
        are not active, quoted prices for similar assets or liabilities in active
        markets, or inputs that are observable, either directly or indirectly,
        for substantially the full term of the asset or liability.
| |           |                                                                                                                                                                                                                                                                  
| | Level 3  | Unobservable (supported by little
        or no market activity) prices.                                                                                                                                                                                         

Cash equivalents are recorded at face
  value. Accounts receivable and advances are short-term in nature and represent
  the initial price of the good or service. Long term and convertible debt have
  been fair valued using assumptions with respect to interest rates relevant to
  similar debt taking into account the collateral involved.

F-40

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|15. | Financial Instruments and Risk Management- Continued                                                                                                                                                                                                                                         
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                              
|    | The fair values of the Company's financial assets, cash
        and equivalents, accounts receivables and advances, and investment approximate
        their carrying amounts, and are considered to be level 2 fair value hierarchy
        with observable inputs.                         
|    |                                                                                                                                                                                                                                                                                              
|    | The fair values of the Company's accounts payable and
        accrued liabilities are below its carrying amount due to liquidity risk
        of the Company. Also, see Note 1. The fair value of the Company's long
        term debt and convertible debt approximate the carrying amounts.

F-41

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|15. | Financial Instruments and Risk Management- Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Capital Management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Similar to other companies in the development
        stage, the Company is in discussions with certain parties to provide funding
        which will enable the Company to execute its business plan. With the completion
        of the DFS and taking into account the current permitting process the
        Company is in, PolyMet will require additional funds through Project construction.
        Funding for the Project could come from a number of sources and include
        internal cash flows (for the second stage of the construction), bank project
        financing and capital market financing. During the upcoming fiscal year,
        the Companys objective is to identify the source or sources from
        which it will obtain the capital required to complete the Project.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The Company has no externally imposed capital
        requirements. In the management of capital, the Company includes the components
        of shareholders equity, convertible debt and long-term debt. The
        Company manages the capital structure and makes adjustments to it depending
        on economic conditions and the rate of anticipated expenditures. To maintain
        or adjust the capital structure, the Company may attempt to issue new
        shares, issue new debt, acquire or dispose of assets.                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | In order to assist in management of its capital
        requirements, the Company prepares expenditure budgets that are updated
        as necessary depending on various factors. The budgets are approved by
        the Companys Board of Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Although the Company plans to have the resources
        to carry out its plans and operations through 31 January 2012 (Note 1),
        it does not currently have sufficient capital to meet its estimated project
        capital expenditure requirements and is currently in discussions to arrange
        sufficient capital to meet these requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|16. | Differences Between Canadian and United
        States Generally Accepted Accounting Principles                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | These consolidated financial statements are
        prepared in accordance with Canadian generally accepted accounting principles
        (GAAP). The U.S. Securities and Exchange Commission requires
        that financial statements of foreign registrants contain a reconciliation
        presenting the statements on the basis of accounting principles generally
        accepted in the U.S. U.S. GAAP also requires additional disclosures which
        are set out in this financial statement note. Any differences in accounting
        principles as they pertain to the accompanying consolidated financial
        statements are not material except as follows:                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

F-42

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|16. | Differences Between Canadian and United States Generally
        Accepted Accounting Principles- Continued
|--- | ----------------------------------------------------------------------------------------------------------

The effects of the above difference in
  accounting principle on convertible debt and shareholders equity are as
  follows:

| |                                                  |   | 2011    |  |   | 2010   |  |   | 2009   | 
| | ------------------------------------------------ | - | ------- |  | - | ------ |  | - | ------ | 
| | Convertible Debt  Canadian GAAP basis           | $ | 27,633  |  | $ | 25,253 |  | $ | 13,943 | 
| | Convertible Debt  US GAAP basis                 | $ | 27,883  |  | $ | 25,503 |  | $ | 14,193 | 
| | Shareholders Equity  Canadian GAAP
      basis | $ | 102,618 |  | $ | 97,567 |  | $ | 70,335 | 
| | Shareholders Equity  US GAAP basis             | $ | 102,368 |  | $ | 97,317 |  | $ | 70,085 | 

(b) Development Stage Company

The Company meets the definition of a
  development stage enterprise under United States Accounting Standard Codification
  (ASC) 915 (formerly Statement of Financial Accounting Standards
  (SFAS) No. 7), Accounting and Reporting by Development Stage Enterprises.
  The following additional disclosures are required under this standard. Management
  has determined, in accordance with ASC 915 that the Company was dormant for
  a period to 31 January 2002, as such the required disclosures have been included
  commencing from 1 February 2003.

F-43

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|16. | Differences Between Canadian and United States Generally
        Accepted Accounting Principles- Continued
|--- | ----------------------------------------------------------------------------------------------------------

Consolidated Statements
  of Loss, Other Comprehensive Loss and DeficitCumulative from 1 February 2003 to 31 January 2011

| |                                               |  | Cumulative    |  
| | --------------------------------------------- |  | ------------- | -
| |                                               |  | from 1        |  
| |                                               |  | February 2003 |  
| |                                               |  | to 31 January |  
| |                                               |  | 2011          |  
| |                                               |  | (unaudited)   |  
| | Pre-feasibility Costs                         |  | 21,679        |  
| | General and Administrative                    |  |               |  
| | Amortization                                  |  | 162           |  
| | Asset retirement obligation accretion         |  | 1,948         |  
| | Consulting fees                               |  | 3,072         |  
| | Exploration                                   |  | 193           |  
| | Financing costs write-off                     |  | 1,830         |  
| | Investor relations and financing              |  | 1,380         |  
| | Office and corporate wages                    |  | 7,476         |  
| | Professional fees                             |  | 2,999         |  
| | Shareholders information                     |  | 1,480         |  
| | Stock-based compensation                      |  | 11,212        |  
| | Transfer agent and filing fees                |  | 829           |  
| | Travel                                        |  | 2,631         |  
| | Warrant amendment                             |  | 5,464         |  
| |                                               |  | 40,676        |  
| | Other Expenses (Income)                       |  |               |  
| | Interest income, net                          |  | (1,886        | )
| | Loss (gain) on foreign exchange               |  | (207          | )
| | Gain on sale of resource properties           |  | (220          | )
| | Loss on refinancing of convertible
      debt |  | 3,647         |  
| | Loss on sale of property, plant and equipment |  | 9             |  
| | Loss on asset held for sale                   |  | 520           |  
| | Investment loss                               |  | 2,415         |  
| | Rental income                                 |  | (625          | )
| |                                               |  | 3,653         |  
| | Cumulative Loss for the Period Before Tax     |  | 66,008        |  
| | Tax recovery on warrant expiration            |  | (1,390        | )
| | Cumulative Loss for the Period                |  | 64,618        |  
| |                                               |  |               |  
| | Other Comprehensive Income                    |  |               |  
| | Unrealized loss on investment                 |  | 6             |  
| | Comprehensive Loss                            |  | 64,624        |  
| |                                               |  |               |  
| | Deficit Beginning of the Period               |  | 14,214        |  
| | Deficit End of the Period                     |  | 78,832        |  

F-44

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|16. | Differences Between Canadian and United States Generally
        Accepted Accounting Principles- Continued
|--- | ----------------------------------------------------------------------------------------------------------

ConsolidatedStatementsofChangesinShareholdersEquity(unaudited)Cumulativefrom 1February2003 to 31January2011

|                                                                                        |  |             |  |  |            |  |  |        |   |  |                     |   |  | Accumulated   |  |  |         |   |  |        |  
|--------------------------------------------------------------------------------------- |  | ----------- |  |  | ---------- |  |  | ------ | - |  | ------------------- | - |  | ------------- |  |  | ------- | - |  | ------ | -
|                                                                                        |  |             |  |  |            |  |  |        |   |  |                     |   |  | Other         |  |  |         |   |  |        |  
|                                                                                        |  | Issue Price |  |  |            |  |  |        |   |  |                     |   |  | Comprehensive |  |  |         |   |  |        |  
|                                                                                        |  | Per Share   |  |  | Shares     |  |  | Amount |   |  | Contributed Surplus |   |  | Income        |  |  | Deficit |   |  | Total  |  
|Balance  31 January 2003                                                               |  |             |  |  | 32,657,526 |  |  | 14,183 |   |  | -                   |   |  | -             |  |  | (14,214 | ) |  | (31    | )
|Loss for the year                                                                       |  |             |  |  | -          |  |  | -      |   |  | -                   |   |  | -             |  |  | (147    | ) |  | (147   | )
|Shares issued for cash:                                                                 |  |             |  |  |            |  |  |        |   |  |                     |   |  |               |  |  |         |   |  |        |  
|Private placements,
      net of finders fees                
      and issuance costs |  | 0.09        |  |  | 11,708,318 |  |  | 999    |   |  | -                   |   |  | -             |  |  | -       |   |  | 999    |  
|Share
      subscriptions received                                                      |  | -           |  |  | -          |  |  | 763    |   |  | -                   |   |  | -             |  |  | -       |   |  | 763    |  
|Exercise of warrants                                                                    |  | 0.08        |  |  | 486,610    |  |  | 41     |   |  | -                   |   |  | -             |  |  | -       |   |  | 41     |  
|Exercise
      of options                                                               |  | 0.06        |  |  | 89,600     |  |  | 5      |   |  | -                   |   |  | -             |  |  | -       |   |  | 5      |  
|Shares issued to settle debt                                                            |  | 0.07        |  |  | 50,000     |  |  | 4      |   |  | -                   |   |  | -             |  |  | -       |   |  | 4      |  
|Stock-based compensation                                                                |  |             |  |  | -          |  |  | -      |   |  | 55                  |   |  | -             |  |  | -       |   |  | 55     |  
|Balance 31 January 2004                                                                 |  |             |  |  | 44,992,054 |  |  | 15,995 |   |  | 55                  |   |  | -             |  |  | (14,361 | ) |  | 1,689  |  
|Loss for the year                                                                       |  | -           |  |  | -          |  |  | -      |   |  | -                   |   |  | -             |  |  | (4,416  | ) |  | (4,416 | )
|Shares issued for cash:                                                                 |  |             |  |  |            |  |  |        |   |  |                     |   |  |               |  |  |         |   |  |        |  
|Private
      placements, net of finders fees                
      and issuance costs |  | 0.58        |  |  | 2,955,626  |  |  | 1,715  |   |  | -                   |   |  | -             |  |  | -       |   |  | 1,715  |  
|Share subscriptions
      received                                                      |  | -           |  |  | -          |  |  | (763   | ) |  | -                   |   |  | -             |  |  | -       |   |  | (763   | )
|Exercise
      of warrants                                                              |  | 0.16        |  |  | 5,277,573  |  |  | 829    |   |  | -                   |   |  | -             |  |  | -       |   |  | 829    |  
|Exercise of options                                                                     |  | 0.07        |  |  | 1,088,400  |  |  | 81     |   |  | -                   |   |  | -             |  |  | -       |   |  | 81     |  
|Shares issued for property                                                              |  | 0.23        |  |  | 1,000,000  |  |  | 229    |   |  | -                   |   |  | -             |  |  | -       |   |  | 229    |  
|Stock-based compensation                                                                |  | -           |  |  | -          |  |  | -      |   |  | 993                 |   |  | -             |  |  | -       |   |  | 993    |  
|Fair value of stock options
      exercised                                             |  | -           |  |  | -          |  |  | 42     |   |  | (42                 | ) |  | -             |  |  | -       |   |  | -      |  
|Shares allotted for exercise of warrants                                                |  | 0.12        |  |  | 224,925    |  |  | 26     |   |  | -                   |   |  | -             |  |  | -       |   |  | 26     |  
|Shares allotted for bonus                                                               |  | 0.55        |  |  | 1,590,000  |  |  | 873    |   |  | -                   |   |  | -             |  |  | -       |   |  | 873    |  
|Balance 31 January 2005                                                                 |  |             |  |  | 57,128,578 |  |  | 19,027 |   |  | 1,006               |   |  | -             |  |  | (18,777 | ) |  | 1,256  |  

F-45

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|**16.** | Differences Between Canadian and United States
      Generally Accepted Accounting Principles- Continued
|------- | --------------------------------------------------------------------------------------------------------

ConsolidatedStatementsofChangesinShareholdersEquity(unaudited)(continued)Cumulativefrom 1February2003 to 31January2011

|                                                                                        |  |             |  |  |             |  |  |        |  |  |                     |   |  | Accumulated   |  |  |         |   |  |         |  
|--------------------------------------------------------------------------------------- |  | ----------- |  |  | ----------- |  |  | ------ |  |  | ------------------- | - |  | ------------- |  |  | ------- | - |  | ------- | -
|                                                                                        |  |             |  |  |             |  |  |        |  |  |                     |   |  | Other         |  |  |         |   |  |         |  
|                                                                                        |  | Issue Price |  |  |             |  |  |        |  |  |                     |   |  | Comprehensive |  |  |         |   |  |         |  
|                                                                                        |  | Per Share   |  |  | Shares      |  |  | Amount |  |  | Contributed Surplus |   |  | Income        |  |  | Deficit |   |  | Total   |  
|Balance 31 January 2005 (brought forward)                                               |  |             |  |  | 57,128,578  |  |  | 19,027 |  |  | 1,006               |   |  | -             |  |  | (18,777 | ) |  | 1,256   |  
|Loss for the year                                                                       |  | -           |  |  | -           |  |  | -      |  |  | -                   |   |  | -             |  |  | (15,976 | ) |  | (15,976 | )
|Shares issued for cash:                                                                 |  |             |  |  |             |  |  |        |  |  |                     |   |  |               |  |  |         |   |  |         |  
|Private placements,
      net of finders fees                
      and issuance costs |  | 0.66        |  |  | 29,347,568  |  |  | 15,827 |  |  | 3,653               |   |  | -             |  |  | -       |   |  | 19,480  |  
|Exercise
      of warrants                                                              |  | 0.58        |  |  | 5,700,628   |  |  | 3,296  |  |  | -                   |   |  | -             |  |  | -       |   |  | 3,296   |  
|Exercise of options                                                                     |  | 0.11        |  |  | 1,795,852   |  |  | 197    |  |  | -                   |   |  | -             |  |  | -       |   |  | 197     |  
|Shares issued for property                                                              |  | 1.22        |  |  | 6,200,547   |  |  | 7,564  |  |  | -                   |   |  | -             |  |  | -       |   |  | 7,564   |  
|Stock-based compensation                                                                |  | -           |  |  | -           |  |  | -      |  |  | 3,523               |   |  | -             |  |  | -       |   |  | 3,523   |  
|Fair value of stock options exercised                                                   |  | -           |  |  | -           |  |  | 98     |  |  | (98                 | ) |  | -             |  |  | -       |   |  | -       |  
|Balance 31 January 2006                                                                 |  |             |  |  | 100,173,173 |  |  | 46,009 |  |  | 8,084               |   |  | -             |  |  | (34,753 | ) |  | 19,340  |  
|Loss for the year                                                                       |  | -           |  |  | -           |  |  | -      |  |  | -                   |   |  | -             |  |  | (18,126 | ) |  | (18.126 | )
|Issuance of shares for bonus                                                            |  | 0.55        |  |  | 2,350,000   |  |  | 1,289  |  |  | -                   |   |  | -             |  |  | -       |   |  | 1,289   |  
|Shares issued for cash:                                                                 |  |             |  |  |             |  |  |        |  |  |                     |   |  |               |  |  |         |   |  |         |  
|Exercise of warrants                                                                    |  | 0.98        |  |  | 14,662,703  |  |  | 17,963 |  |  | (3,653              | ) |  | -             |  |  | -       |   |  | 14,310  |  
|Exercise
      of options                                                               |  | 0.35        |  |  | 2,193,000   |  |  | 765    |  |  | -                   |   |  | -             |  |  | -       |   |  | 765     |  
|Shares issued for property                                                              |  | 3.08        |  |  | 2,000,000   |  |  | 6,160  |  |  | -                   |   |  | -             |  |  | -       |   |  | 6,160   |  
|Stock-based compensation                                                                |  | -           |  |  | -           |  |  | -      |  |  | 4,723               |   |  | -             |  |  | -       |   |  | 4,723   |  
|Warrants issued for deferred financing
      costs                                      |  | -           |  |  | -           |  |  | -      |  |  | 1,197               |   |  | -             |  |  | -       |   |  | 1,197   |  
|Fair value of stock options exercised                                                   |  | -           |  |  | -           |  |  | 737    |  |  | (737                | ) |  | -             |  |  | -       |   |  | -       |  
|Balance  31 January 2007                                                               |  |             |  |  | 121,378,876 |  |  | 72,923 |  |  | 9,614               |   |  | -             |  |  | (52,879 | ) |  | 29,658  |  

F-46

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|**16.** | Differences Between Canadian and United States
      Generally Accepted Accounting Principles- Continued
|------- | --------------------------------------------------------------------------------------------------------

ConsolidatedStatementsofChangesinShareholdersEquity(unaudited)(continued)Cumulativefrom 1February2003 to 31January2011

|                                                                                       |  |             |  |  |             |  |  |         |  |  |                     |   |  | Accumulated   |  |  |         |   |  |        |  
|-------------------------------------------------------------------------------------- |  | ----------- |  |  | ----------- |  |  | ------- |  |  | ------------------- | - |  | ------------- |  |  | ------- | - |  | ------ | -
|                                                                                       |  |             |  |  |             |  |  |         |  |  |                     |   |  | Other         |  |  |         |   |  |        |  
|                                                                                       |  | Issue Price |  |  |             |  |  |         |  |  |                     |   |  | Comprehensive |  |  |         |   |  |        |  
|                                                                                       |  | Per Share   |  |  | Shares      |  |  | Amount  |  |  | Contributed Surplus |   |  | Income        |  |  | Deficit |   |  | Total  |  
|Balance  31 January 2007 (brought forward)                                            |  |             |  |  | 121,378,876 |  |  | 72,923  |  |  | 9,614               |   |  | -             |  |  | (52,879 | ) |  | 29,658 |  
|Loss for the year                                                                      |  | -           |  |  | -           |  |  | -       |  |  | -                   |   |  | -             |  |  | (4,124  | ) |  | (4,124 | )
|Shares and warrants issued:                                                            |  |             |  |  |             |  |  |         |  |  |                     |   |  |               |  |  |         |   |  |        |  
|Exercise of options                                                                    |  | 0.66        |  |  | 462,200     |  |  | 303     |  |  | -                   |   |  | -             |  |  | -       |   |  | 303    |  
|Fair
      value of stock options exercised                                            |  | -           |  |  | -           |  |  | 212     |  |  | (212                | ) |  | -             |  |  | -       |   |  | -      |  
|Private placement,
      net of finders fees                
      and issuance costs |  | 2.61        |  |  | 15,149,999  |  |  | 31,177  |  |  | 8,346               |   |  | -             |  |  | -       |   |  | 39,523 |  
|Stock-based compensation                                                               |  | -           |  |  | -           |  |  | -       |  |  | 3,077               |   |  | -             |  |  | -       |   |  | 3,077  |  
|Balance  31 January 2008                                                              |  |             |  |  | 136,991,075 |  |  | 104,615 |  |  | 20,825              |   |  | -             |  |  | (57,003 | ) |  | 68,437 |  
|Loss for the year                                                                      |  | -           |  |  | -           |  |  | -       |  |  | -                   |   |  | -             |  |  | (5,523  | ) |  | (5,523 | )
|Shares and warrants issued:                                                            |  |             |  |  |             |  |  |         |  |  |                     |   |  |               |  |  |         |   |  |        |  
|Exercise
      of options                                                              |  | 1.45        |  |  | 312,800     |  |  | 452     |  |  | -                   |   |  | -             |  |  | -       |   |  | 452    |  
|Fair value of stock
      options exercised                                            |  | -           |  |  | -           |  |  | 245     |  |  | (245                | ) |  | -             |  |  | -       |   |  | -      |  
|Convertible debt
       conversion factor and warrants                                |  | -           |  |  | -           |  |  | -       |  |  | 441                 |   |  | -             |  |  | -       |   |  | 441    |  
|Accrual of Milestones 2 and 4 Bonus Shares                                             |  | -           |  |  | -           |  |  | -       |  |  | 3,912               |   |  | -             |  |  | -       |   |  | 3,912  |  
|Amendment to previously
      issued warrants                                          |  | -           |  |  | -           |  |  | -       |  |  | 544                 |   |  | -             |  |  | -       |   |  | 544    |  
|Stock-based compensation                                                               |  | -           |  |  | -           |  |  | -       |  |  | 1,822               |   |  | -             |  |  | -       |   |  | 1,822  |  
|Balance  31 January 2009                                                              |  |             |  |  | 137,303,875 |  |  | 105,312 |  |  | 27,299              |   |  | -             |  |  | (62,526 | ) |  | 70,085 |  

F-47

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|**16.** | Differences Between Canadian and United States
      Generally Accepted Accounting Principles- Continued
|------- | --------------------------------------------------------------------------------------------------------

ConsolidatedStatementsofChangesinShareholdersEquity(unaudited)(continued)Cumulativefrom 1February2003 to 31January2011

|                                                        |  |             |  |  |             |  |  |         |  |  |                     |   |  | Accumulated   |   |  |         |   |  |         |  
|------------------------------------------------------- |  | ----------- |  |  | ----------- |  |  | ------- |  |  | ------------------- | - |  | ------------- | - |  | ------- | - |  | ------- | -
|                                                        |  |             |  |  |             |  |  |         |  |  |                     |   |  | Other         |   |  |         |   |  |         |  
|                                                        |  | Issue Price |  |  |             |  |  |         |  |  |                     |   |  | Comprehensive |   |  |         |   |  |         |  
|                                                        |  | Per Share   |  |  | Shares      |  |  | Amount  |  |  | Contributed Surplus |   |  | Income        |   |  | Deficit |   |  | Total   |  
|Balance  31 January 2009 (brought
      forward)       |  |             |  |  | 137,303,875 |  |  | 105,312 |  |  | 27,299              |   |  | -             |   |  | (62,526 | ) |  | 70,085  |  
|Loss for the year                                       |  | -           |  |  | -           |  |  | -       |  |  | -                   |   |  | -             |   |  | (9,023  | ) |  | (9,023  | )
|Other comprehensive income
      for the year           |  | -           |  |  | -           |  |  | -       |  |  | -                   |   |  | 71            |   |  | -       |   |  | 71      |  
|Shares and warrants issued:                             |  |             |  |  |             |  |  |         |  |  |                     |   |  |               |   |  |         |   |  |         |  
|Equity
      offering and issuance costs                |  | 2.60        |  |  | 9,433,962   |  |  | 24,501  |  |  | -                   |   |  | -             |   |  | -       |   |  | 24,501  |  
|Exercise of options                                     |  | 0.62        |  |  | 775,000     |  |  | 477     |  |  | -                   |   |  | -             |   |  | -       |   |  | 477     |  
|Fair
      value of stock options exercised             |  | -           |  |  | -           |  |  | 307     |  |  | (307                | ) |  | -             |   |  | -       |   |  | -       |  
|Exercise of warrants                                    |  | 2.94        |  |  | 167,954     |  |  | 494     |  |  | -                   |   |  | -             |   |  | -       |   |  | 494     |  
|Fair
      value of warrants exercised                  |  | -           |  |  | -           |  |  | 254     |  |  | (254                | ) |  | -             |   |  | -       |   |  | -       |  
|Convertible debt  conversion factor                    |  | -           |  |  | -           |  |  | -       |  |  | 352                 |   |  | -             |   |  | -       |   |  | 352     |  
|Milestones 2 and 4 Bonus
      Shares cost amortization |  | -           |  |  | -           |  |  | -       |  |  | 4,200               |   |  | -             |   |  | -       |   |  | 4,200   |  
|Amendment to previously issued warrants                 |  | -           |  |  | -           |  |  | -       |  |  | 4,920               |   |  | -             |   |  | -       |   |  | 4,920   |  
|Issuance of Milestone
      2 Bonus Shares              |  | 0.55        |  |  | 1,300,000   |  |  | 721     |  |  | (721                | ) |  | -             |   |  | -       |   |  | -       |  
|Stock-based compensation                                |  | -           |  |  | -           |  |  | -       |  |  | 1,240               |   |  | -             |   |  | -       |   |  | 1,240   |  
|Balance  31 January 2010                               |  |             |  |  | 148,980,791 |  |  | 132,066 |  |  | 36,729              |   |  | 71            |   |  | (71,549 | ) |  | 97,317  |  
|Loss for the period                                     |  | -           |  |  | -           |  |  | -       |  |  | -                   |   |  | -             |   |  | (7,283  | ) |  | (7,283  | )
|Other comprehensive income
      for the period         |  | -           |  |  | -           |  |  | -       |  |  | -                   |   |  | (77           | ) |  | -       |   |  | (77     | )
|Shares and warrants issued:                             |  |             |  |  |             |  |  |         |  |  |                     |   |  |               |   |  |         |   |  |         |  
|Equity
      offering and issuance costs                |  | 1.98        |  |  | 5,000,000   |  |  | 9,019   |  |  | 875                 |   |  | -             |   |  | -       |   |  | 9,894   |  
|Exercise of options                                     |  | 0.96        |  |  | 845,000     |  |  | 808     |  |  | -                   |   |  | -             |   |  | -       |   |  | 808     |  
|Fair
      value of stock options exercised             |  | -           |  |  | -           |  |  | 480     |  |  | (480                | ) |  | -             |   |  | -       |   |  | -       |  
|Refinancing of convertible debt                         |  | -           |  |  | -           |  |  | -       |  |  | 3,125               |   |  | -             |   |  | -       |   |  | 3,125   |  
|Milestone 4 Bonus Shares
      cost amortization        |  | -           |  |  | -           |  |  | -       |  |  | (89                 | ) |  | -             |   |  | -       |   |  | (89     | )
|Future income tax recovery                              |  | -           |  |  | -           |  |  | -       |  |  | (1,390              | ) |  | -             |   |  | -       |   |  | (1,390  | )
|Stock-based compensation                                |  | -           |  |  | -           |  |  | -       |  |  | 63                  |   |  | -             |   |  | -       |   |  | 63      |  
|Balance  31 January 2011                               |  |             |  |  | 154,825,791 |  |  | 142,373 |  |  | 38,833              |   |  | (6            | ) |  | (78,832 | ) |  | 102,368 |  

F-48

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|16. | Differences Between Canadian and United States Generally
        Accepted Accounting Principles- Continued
|--- | ----------------------------------------------------------------------------------------------------------

Consolidated Statements
  of Cash FlowsCumulative from 1 February 2003 to 31 January 2011

| |                                                                |   | Cumulative  |  
| | -------------------------------------------------------------- | - | ----------- | -
| |                                                                |   | from 1      |  
| |                                                                |   | February    |  
| |                                                                |   | 2003 to 31  |  
| |                                                                |   | January     |  
| |                                                                |   | 2011        |  
| |                                                                |   | (unaudited) |  
| | Operating Activities                                           |   |             |  
| | Loss for the period                                            | $ | (60,971     | )
| | Items not involving cash                                       |   |             |  
| | Consulting fees and Office
      and Corporate wages           |   | 2,161       |  
| | Amortization                                                   |   | 162         |  
| | Asset retirement obligation                                    |   | 1,948       |  
| | Financing
      cost write-off                                 |   | 1,830       |  
| | Future income tax recovery                                     |   | (1,390      | )
| | Investment
      loss                                          |   | 2,415       |  
| | Loss on asset held for sale                                    |   | 520         |  
| | Stock-based
      compensation                                 |   | 11,212      |  
| | Warrant amendment                                              |   | 5,464       |  
| | Gain on sale
      of resource properties                      |   | (220        | )
| | Loss on sale of property,
      plant and equipment            |   | 9           |  
| | Changes in non-cash working
      capital items                |   |             |  
| | Accounts receivable and advances                               |   | (312        | )
| | Prepaid expenses                                               |   | (636        | )
| | Accounts payable and accrued
      liabilities                 |   | 377         |  
| | Net cash used in operating activities                          |   | (37,431     | )
| |                                                                |   |             |  
| | Financing Activities                                           |   |             |  
| | Share capital - for cash                                       |   | 117,432     |  
| | Long-term debt repayment                                       |   | (7,900      | )
| | Convertible debt                                               |   | 24,277      |  
| | Share subscriptions received                                   |   | 763         |  
| | Deferred financing costs                                       |   | (633        | )
| | Net cash provided by financing activities                      |   | 133,939     |  
| |                                                                |   |             |  
| | Investing Activities                                           |   |             |  
| | Purchase of investment                                         |   | (2,495      | )
| | Proceeds on disposal of equipment                              |   | 33          |  
| | Proceeds on sale of resource property                          |   | 220         |  
| | Purchase of mineral property,
      plant and equipment        |   | (83,908     | )
| | Net cash used in investing activities                          |   | (86,150     | )
| |                                                                |   |             |  
| | Net Increase (Decrease) in Cash and Cash Equivalents Position  |   | 10,358      |  
| | Cash and Cash Equivalents Position - Beginning
      of Period |   | 3           |  
| | Cash and Cash Equivalents
      Position - End of Period       | $ | 10,361      |  

F-49

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|16. | Differences Between Canadian and United States Generally
        Accepted Accounting Principles- Continued
|--- | ----------------------------------------------------------------------------------------------------------

Consolidated Schedules
  of Pre-Feasibility CostsCumulative from 1 February 2003 to 31 January 2011

| |                                       |   | Cumulative  | 
| | ------------------------------------- | - | ----------- | 
| |                                       |   | from 1      | 
| |                                       |   | February    | 
| |                                       |   | 2003 to 31  | 
| |                                       |   | January     | 
| |                                       |   | 2011        | 
| |                                       |   | (unaudited) | 
| |                                       |   |             | 
| | Direct                                |   |             | 
| | Camp and general                      | $ | 298         | 
| | Consulting fees                       |   | 1,846       | 
| | Drilling                              |   | 3,169       | 
| | Engineering                           |   | 1,441       | 
| | Environmental                         |   | 6,130       | 
| | Geological and geophysical            |   | 303         | 
| | Land lease, taxes and licenses        |   | 469         | 
| | Metallurgical                         |   | 2,275       | 
| | Mine planning                         |   | 3,597       | 
| | Permitting                            |   | 321         | 
| | Plant maintenance and repair          |   | 725         | 
| | Sampling                              |   | 1,001       | 
| | Scoping study                         |   | 104         | 
| |                                       |   |             | 
| | Cumulative Total Costs for the Period | $ | 21,679      | 

F-50

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|16. | Differences Between Canadian and United States
      Generally Accepted Accounting Principles- Continued
|--- | --------------------------------------------------------------------------------------------------------

(c) Mineral Rights

The total amount paid for mineral rights
  to 31 January 2011 was $1,925,000.

(d) Accounts Payable

The components of accounts payable and
  accrued liabilities as at 31 January are as follows:

| |                              |   | 2011  |  |   | 2010  | 
| | ---------------------------- | - | ----- |  | - | ----- | 
| |                              |   |       |  |   |       | 
| | Operating payables           |   | 236   |  |   | 376   | 
| | Project development payables |   | 1,093 |  |   | 1,561 | 
| | Equipment payables           |   | 1,115 |  |   | 1,016 | 
| |                              |   |       |  |   |       | 
| | Total                        | $ | 2,444 |  | $ | 2,953 | 

(e) Stock-Based Compensation

As at 31 January 2010, there were 1,855,000 unvested stock options with an average grant date fair value of $1.16 per option.  As at 31 January 2011, there were 1,722,500 unvested stock options with an average grant date fair value of $1.20 per option.  During the year ended 31 January 2011, 122,500 additional stock options vested.

The intrinsic value of a stock option is the difference between the current market price for PolyMet’s common shares and the exercise price of the option.  At 31 January 2011, the aggregate intrinsic value of vested and unvested stock options, based on the 31 January 2011 closing price for PolyMet’s common shares of $2.05 was $(104,000).

The weighted average remaining contractual
  term of all stock options outstanding as at 31 January 2011 is 2.88 years. The
  weighted average remaining contractual term of all stock options vested as at
  31 January 2011 was 2.69years.

The unrecognized compensation cost for
  non-vested stock options at 31 January 2011 was $323,000. The weighted average
  period over which it is expected to be recognized is 2.28 years.

PolyMet records stock-based compensation expense as a separate line item in the Company’s consolidated statements of loss, other comprehensive loss and deficit.  If stock-based compensation had been recorded on the same line as cash compensation for the individuals who received the stock options, a recovery of $119,000 for the year ended 31 January 2011, an expense of $915,000 for the year ended 31 January 2010, and an expense of $487,000 for the year ended 31 January 2009 would have been recorded under office and corporate wages expense.

The Company has estimated the expected
  life of incentive stock options to be 1.5 years based on historic option exercise
  patterns and the timeline for material developments in the past and anticipated
  in future.

F-51

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|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended 31 January 2011, 2010 and 2009                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|16. | Differences Between Canadian and United States
      Generally Accepted Accounting Principles- Continued
|--- | --------------------------------------------------------------------------------------------------------

| | f) | Recent U.S. Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                         
| |    | The Company transitioned to IFRS on 1 February 2011
        and will no longer be required to prepare a reconciliation to US GAAP.
        Accordingly, PolyMet has not assessed the impact of adopting recent US
        accounting pronouncements with an application date of 1 February 2011
        or beyond in the Companys financial statements and disclosures.

F-52

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|ITEM 19. EXHIBITS |                                                                                                     
|----------------- | ----------------------------------------------------------------------------------------------------
|Exhibit           |                                                                                                     
|No.               | Description                                                                                         
|1.1               | Certificate of Incorporation.                                                                       
|1.2               | Certificate of Change of Name.                                                                      
|1.3               | Articles of Incorporation of PolyMet
      Mining Corp.                                             
|4.1               | Incentive Stock Option Plan.                                                                        
|4.2               | Shareholder Rights Plan Agreement.                                                                  
|4.3               | Contract for Deed between us and Cleveland Cliffs,
      Ohio, dated November 15, 2005.             
|4.4               | Contract for Deed between us and
      Cleveland Cliffs, Ohio, dated December 20, 2006              
|4.5               | Purchase Agreement between us and Glencore, dated
      October 31, 2008                            
|4.6               | Floating Rate Secured Debenture
      between us and Glencore, dated October 31, 2008               
|4.7               | Parent Guarantee between PolyMet Mining Corp.
      and Glencore, dated October 31, 2008            
|4.8               | Security Agreement between PolyMet
      Mining Corp. and Glencore, dated October 31, 2008          
|4.9               | Security Agreement between Poly Met Mining, Inc.
      and Glencore, dated October 31, 2008         
|4.10              | Pledge Agreement between us and
      Glencore, dated October 31, 2008                              
|4.11              | Exchange Warrant of PolyMet Mining Corp., dated
      October 31, 2008                              
|4.12              | Purchase Warrant of PolyMet Mining
      Corp., dated October 31, 2008                              
|4.13              | Amendment Letter number 11 to Purchase Agreement
      between us and Glencore                      
|4.14              | Amendment and    Waiver between the Company, the Issuer and the Purchaser dated November 12,    2010
|4.15              | Form of Warrant    dated November 12, 2010                                                          
|4.16              | Subscription    Agreement dated November 12, 2010                                                   
|4.17              | Registration    Rights Agreement dated November 12, 2010                                            

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|6.1   | 2007 PolyMet Omnibus Share Compensation
      Plan                                                                                               | (7)
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------ | ---
|8.1   | List of Subsidiaries.                                                                                                                            | (2)
|11.1  | Code of Ethics.                                                                                                                                  | (3)
|11.2  | Statement of Corporate Governance Practices, including
      Audit Mandate and Charter.                                                          | (4)
|12.1  | Certification
      of Principal Executive Officer pursuant to 17 C.F.R. 240.13a-14(a).                                                          | *  
|12.2  | Certification of Principal
      Financial Officer pursuant to 17 C.F.R. 240.13a-14(a).                                                          | *  
|13.1  | Certification
      of Principal Executive Officer and Principal Financial Officer pursuant
      to 17 C.F.R. 240.13a-14(b) and 18 U.S.C. 1350. | *  
|14.1  | Amended and Restated Shareholder Rights Plan                                                                                                     | (7)
|15.1  | Technical Report on NorthMet Project
      by P. Downey and Associates, dated July 2004                                                          | (5)
|15.2  | Subscription
      Agreement dated as of July 19, 2004, between us and certain investor(s).                                                      | (2)
|15.3  | Subscription Agreement dated as
      of February 11, 2005, between us and certain investor(s).                                                  | (2)
|15.4  | Subscription
      Agreement closing on August 29, 2005, between us and certain investor(s).                                                     | (2)
|15.5  | Subscription Agreement dated as
      of September 21, 2005, between us and certain investor(s).                                                 | (2)
|15.6  | Form of Canadian
      Subscription Agreement between us and certain investor (s).                                                               | (1)
|15.7  | Form of U.S. Subscription
      Agreement between us and certain investor(s).                                                                    | (1)
|15.8  | Lease Agreement
      between us and U.S. Steel Corporation, dated January 4, 1989.                                                              | (2)
|15.9  | Notice of Assignment of the Lease
      Agreement from U.S. Steel Corporation to RGGS Land and Minerals, Ltd. L.P.                               | (2)
|15.10 | Nominating and
      Corporate Governance Committee Charter                                                                                      | (7)
|15.11 | Technical Report on NorthMet
      Project by P.J. Hunter C. Eng. CP dated October 2006                                                          | (6)
|15.12 | Consent
      of Independent Registered Public Accounting Firm                                                                                   | *  
|16.1  | Audit Committee Charter                                                                                                                          | (7)
|17.1  | Executive
      employment agreement with Mr. William Murray dated July 1, 2007 and
      amended January 25, 2008                               | (7)
|17.2  | Executive employment agreement
      with Mr. Douglas Newby dated July 1, 2007                                                                   | (7)
|17.3  | Executive
      employment agreement with Mr. Joseph Scipioni dated July 1, 2007                                                                 | (7)
|17.4  | Employment agreement with Mr.
      Niall Moore dated May 6, 2007 and amended January 25, 2008                                                   | (7)

|Footnote |                                                                                                                                                
|-------- | -----------------------------------------------------------------------------------------------------------------------------------------------
|Ref.     | Description                                                                                                                                    
|*        | Filed herewith.                                                                                                                                
|(1)      | Incorporated by reference to our Annual Report
      on Form 20-F/A for the fiscal year ended January 31, 2007, filed on May 31
      2007.    
|(2)      | Incorporated by reference to our Annual Report
      on Form 20-F/A for the fiscal year ended January 31, 2006, filed on July
      31 2006.   
|(3)      | Incorporated by reference to our Annual Report
      on Form 20-F/A for the fiscal year ended January 31, 2004, filed on July
      7, 2005.   
|(4)      | Incorporated by reference to our Annual Report
      on Form 20-F for the fiscal year ended January 31, 2005, filed on July 25,
      2005.    
|(5)      | Incorporated by reference to our Annual Report
      on Form 20-F for the fiscal year ended January 31, 2004, filed on June 30,
      2004.    
|(6)      | Incorporated by reference to our Report on Form
      6-K, filed on November 13, 2006.                                                         
|(7)      | Incorporated by reference to our Annual Report
      on Form-20-F/A for the fiscal year ended January 31, 2008, filed on August
      27, 2008.

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|(8)  | Incorporated by reference to our Form 13-D relating to
      our Purchase Agreement filed on November 10, 2008.
|---- | ---------------------------------------------------------------------------------------------------------------
|(9)  | Incorporated by reference to our Report on Form 6-K filed
      on November 23, 2009.                          
|(10) | Incorporated by reference to our Report on Form 6-K filed on November 18, 2010.                                

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SIGNATURES

The Registrant hereby certifies that it meets all of the requirements
  for filing on Form 20-F, as
  amended by this Amendment No. 1 on Form 20-F/A, and has duly caused and
  authorized the undersigned to sign this amended Annual Report on its behalf.

Dated: May
  27, 2011

| | POLYMET MINING CORP.
| | --------------------
| |                     
| | /s/ Joseph Scipioni 
| | Name:               
| | Title:              

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